Ch19 Pensions and Other Post-Employment Test Bank + Answers - Test Bank Intermediate Accounting v2 13e | Canada by Donald E. Kieso. DOCX document preview.
CHAPTER 19
PENSIONS AND OTHER
POST-EMPLOYMENT BENEFITS
CHAPTER STUDY OBJECTIVES
1. Understand the importance of pensions from a business perspective. A pension plan, together with post-retirement health care, is often part of an employee’s overall compensation package. The size of these plans, in terms of both the number of employees and cost of benefits, has made their costs very large (on average) relative to companies’ financial position, results of operations, and cash flows. For many years, the vast majority of defined benefit plans were underfunded, and more and more companies have been moving toward defined contribution plans.
2. Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Defined contribution plans are plans that specify how contributions are determined rather than what benefits the individual will receive. They are accounted for in a manner similar to a cash basis. In contrast, defined benefit plans specify the benefits that the employee is entitled to receive. Defined benefit plans whose benefits vest or accumulate typically provide for the benefits to be a function of the employee’s years of service and, for pensions, compensation level. In general, the employer’s obligation for such a plan and the associated cost is accrued as an expense as the employee provides the service. An actuary usually determines the required amounts.
3. Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. The employer’s benefit obligation is the actuarial present value of the benefits that have been earned by employees for services they have provided up to the date of the statement of financial position. The vested benefit method, accumulated benefit method, and projected benefit method are three methods that could be used to measure companies’ obligations. The third method is the one used to determine the defined benefit obligation, basing the calculation of the deferred compensation amount on both vested and non-vested service using future salaries. This last method is used under both IFRS and ASPE. The defined benefit obligation (DBO) is increased by current service cost, net interest/finance cost, and plan amendments that usually increase employee entitlements for prior services, and by actuarial losses. It is reduced by payment of pension benefits and by actuarial gains.
4. Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. Plan assets are increased by company and employee contributions and the actual return that is earned on fund assets (including realized and unrealized gains and losses), and are reduced by pension benefits paid to retirees. A plan’s surplus or deficit is the difference between the defined benefit obligation and the plan assets at a point in time. It tells you the extent to which a company has a net obligation (underfunded) or a surplus (overfunded) relative to the benefits that are promised. All items that change the plan assets and DBO, with the exception of the payments to retirees, change the surplus or deficit.
5. Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. Defined benefit cost is a function of: (1) current service cost, (2) finance cost including the net interest/finance cost on the net defined benefit liability/asset and the remeasurement gain or loss on plan assets, (3) past service costs, and (4) net actuarial gains or losses. Under ASPE, all are immediately included in current expense in their entirety. Under IFRS, pension costs relating to current service, past service, and net interest on the net defined benefit obligation are included in defined benefit expense. Actuarial gains and losses, and any return on plan assets excluding amounts included in the net interest on the net defined benefit obligation (asset), are recognized in other comprehensive income.
6. Account for defined benefit plans with benefits that vest or accumulate other than pension plans. Under ASPE, any non-pension defined benefit plans with benefits that vest or accumulate are accounted for in the same way as defined benefit pension plans. Under IFRS, short-term employee benefits are generally recognized (without discounting) at the amount expected to be paid in exchange for the services provided. Other long-term benefits include items such as paid absences for long service, unrestricted sabbaticals, and long-term disability plans. IFRS requires that remeasurements of the net defined benefit liability (asset) related to these other long-term benefits be reflected in income (not OCI). For termination benefits, IFRS requires the cost of the benefits to be recognized at the earlier of when the company can no longer withdraw an offer of employment and when it recognizes the related restructuring costs.
7. Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. ASPE requires a description of the plans, major changes made in the plans, dates of the actuarial valuations, the fair value of the plan assets, the DBO, and the surplus or deficit and how this relates to the balance sheet account. ASPE also requires that, if not shown separately on the income statement, “remeasurements and other items” should be disclosed in the notes. IFRS requires substantial information, such as reconciliations of changes in the DBO and plan assets, details of amounts included in net income, underlying assumptions and sensitivity analysis, and other information related to determining cash flows.
8. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. IAS 19 is broader and covers more employee benefits than does CPA Canada Handbook, Part II, Section 3462. Under IFRS, most companies are expected to recognize the net defined benefit liability (or asset) on the statement of financial position with items such as current service cost, past service cost, and interest on the DBO and plan assets recognized in net income, and remeasurement changes and actuarial gains and losses reported in other comprehensive income. ASPE is similar, except remeasurement changes and actuarial gains and losses are reported in net income.
9 Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan. The current service cost is a calculation of the present value of the benefits earned by employees that is attributable to the current period. The defined benefit obligation is the present value of the accumulated benefits earned to a point in time, according to the pension formula and using projected salaries. Past service cost is the present value of the additional benefits granted to employees in the case of a plan amendment.
c 1. Employee future benefits
b 2. Types of post-employment benefits
c 3. Categories of employee future benefit plans
d 4. Pension funding and defined benefit expense recognition
d 5. Pension plan design
d 6. Nature of a defined contribution plan
d 7. Nature of a defined contribution plan
a 8. Recognition of past service costs
b 9. Nature of a defined benefit plan
a 10. Nature of a defined benefit plan
b 11. Objective of accounting for defined benefit plans
c 12. Meaning of funding a pension plan
a 13. Accounting problems in pension plans
d 14. Main purpose of an actuary
a 15. Types of pension plans in Canada
a 16. Definition of defined benefit obligation
d 17. Characteristics of vested benefits
b 18. Increase in defined benefit obligation
c 19. Definition of attribution period
d 20. Definition of experience gain or loss
c 21. Methods of measuring pension obligations
a 22. Decrease in defined benefit obligation
b 23. Nature of interest cost included in pension cost
b 24. Actuarial gains and losses under ASPE
b 25. Contributing factors to pension liabilities
d 26. Calculate defined benefit obligation
d 27. Economic risk of defined benefit plans
a 28. Nature of plan assets
b 29. Nature of return on plan assets
b 31. Plan surplus/deficit
b 32. Underfunded pension plan
c 33. Pension plan surplus
b 34. Calculate fair value of plan assets
a 35. Calculate fair value of plan assets
a 36. Calculate fair value of plan assets
c 37. Calculate fair value of plan assets
b 38. Calculate fair value of plan assets
a 39. Calculate fair value of plan assets
c 40. Calculate fair value of plan assets
a 41. Adjustment for actuarial valuations
c 42. Application of defined benefit expense
c 43. Recognition of past service costs
Answer No. Description
b 44. Recognition of net defined benefit asset
a 45. G/L accounts used
c 46. Rationale for expensing past service costs
a 47. Recognition differences between IFRS and ASPE
c 48. Components of defined benefit expense
a 49. Reporting net defined benefit liability/asset
b 50. Calculate defined benefit expense
c 51. Calculate defined benefit expense
c 52. Calculate defined benefit expense
d 53. Calculate defined benefit expense
a 54. Calculate defined benefit expense
b 55. Calculate net defined benefit liability/asset
b 56. Calculate net defined benefit liability/asset
d 57. Calculate defined benefit expense
b 58. Calculate defined benefit expense
b 59. Calculate defined benefit expense
c 60. Calculate defined benefit obligation
b 61. Calculate defined benefit expense
d 62. Calculate defined benefit obligation
a 63. Calculate net defined benefit liability/asset
a 64. Calculate defined benefit expense
c 65. Calculate defined benefit expense
d 66. Calculate past service costs
b 67. Calculate interest on accrued pension obligation
c 68. Identify correct statement
b 69. Post-employment benefits
c 70. Post-employment benefits
b 71. Recording/disclosure of post-employment benefit obligations
c 72. Recognizing employee benefits
d 73. Recognition of remeasurement of other employee future benefits
c 74. Disclosure of post-employment benefits
a 75. Disclosure analysis
d 76. Disclosure requirements
d 77. Disclosure requirements
c 78. Disclosure requirements
d 79. Items reported in OCI
b 80. Projected benefit obligation
c 81. Differences between IFRS and ASPE
c *82. Calculate current service cost
c *83. Calculate defined benefit obligation
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E19-84 Post-employment benefits
E19-85 Defined benefit plans
E19-86 Pension plan assets
E19-87 Pension plan calculations
E19-88 Pension plan calculations
E19-89 Pension plan calculations and journal entries
E19-90 Different methods of measuring pension obligation
E19-91 Defined benefit obligation continuity schedule
E19-92 Plan assets continuity schedule
E19-93 Calculate plan surplus or deficit
E19-94 Calculate plan surplus or deficit
E19-95 Components of defined benefit expense
E19-96 Measuring and recording defined benefit expense
E19-97 Measuring and recording defined benefit expense
E19-98 Measuring and recording defined benefit expense
E19-99 Measuring and recording defined benefit expense
E19-100 Measuring and recording defined benefit expense
E19-101 Differences between pensions and other post-employment health-care benefits
E19-102 Accounting for defined benefit plans other than pension plans under ASPE and IFRS
E19-103 Analyzing disclosure requirements
E19-104 Disclosure requirements
*E19-105 Calculate current service costs
*E19-106 Calculate current service costs
*This topic is dealt with in an Appendix to the chapter.
PROBLEMS
Item Description
P19-107 Measuring and recording defined benefit expense
P19-108 Calculating discount rate and actual return on plan assets
P19-109 Measuring and recording defined benefit expense – IFRS
P19-110 Measuring and recording defined benefit expense – ASPE
P19-111 Calculating defined benefit expense and pension plan surplus or deficit
P19-112 Preparation of a pension work sheet and pension entries
P19-113 Preparation of a pension work sheet and pension entries
MULTIPLE CHOICE QUESTIONS
1. Employee future benefits do NOT include
a) post-employment pension plans.
b) long-term severance benefits.
c) regular vacation pay.
d) unrestricted sabbatical leaves.
Difficulty: Medium
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. Examples of post-employment benefits that are provided after employment but before retirement include all of the following, except
a) long-term disability income benefits.
b) pension plans.
c) long-term severance benefits.
d) continuation of benefits such as health care.
Difficulty: Easy
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. Categories of employee future benefit plans include the
a) future earnings plan.
b) defined pension plan.
c) defined contribution plan.
d) health and benefits plan.
Difficulty: Easy
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. The relationship between the amount funded and the amount reported for defined benefit expense is that
a) defined benefit expense must always equal the amount funded.
b) defined benefit expense will be less than the amount funded.
c) defined benefit expense will be more than the amount funded.
d) defined benefit expense may be greater than, equal to, or less than the amount funded.
Difficulty: Easy
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
5. Companies generally design a pension plan to ensure that
a) the plan is contributory.
b) the plan is non-contributory.
c) the benefits are insured.
d) the contributions are tax deductible.
Difficulty: Easy
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. In a defined contribution plan, a formula is used that
a) defines the benefits that the employee will receive at retirement.
b) ensures that defined benefit expense and the cash funding amount will be different.
c) requires an employer to contribute a sufficient sum each period based on the future benefit.
d) ensures that employers are not at risk to make sure funds are available at retirement.
Difficulty: Medium
Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans.
Section Reference: Types of Pension Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
7. The obligation for a defined contribution plan is calculated by
a) discounting the benefit that the employee will receive at retirement.
b) adding up contributions made plus interest earned less any benefits paid out.
c) the cumulative contributions made to the pension plan.
d) the amount the employer is obligated to contribute for the period.
Difficulty: Easy
Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans.
Section Reference: Types of Pension Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
8. For ASPE and IFRS, the past service costs are
a) recognized immediately in expense.
b) deferred and amortized over the life of the pension.
c) not included in expenses.
d) restated in the year they are applicable to.
Difficulty: Easy
Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans.
Section Reference: Types of Pension Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
9. 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 retirement.
c) requires that defined benefit 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.
Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans.
Section Reference: Types of Pension Plans
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. Which one of the following would NOT be considered a defined benefit plan?
a) Benefit is based on years of service rendered and the investment earnings earned to date of retirement.
b) Benefit is fixed and based on years of services rendered.
c) Benefit is based on years of service and compensation earned by employee over entire period of service.
d) Benefit is based on years of service and compensation over a specified number of years.
Difficulty: Easy
Learning Objective: Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans.
Section Reference: Types of Pension Plans
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
11. The objective of accounting for defined benefit plans is to
a) calculate the actual amounts employees will receive at retirement.
b) recognize the appropriate expense and liability over the accounting periods in which the related services are provided by the employees.
c) calculate the current service cost.
d) determine which employees’ rights have vested.
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
12. In a defined benefit plan, for the employer, the term “funding” refers to
a) being responsible for the assets of the pension plan.
b) determining the defined benefit obligation.
c) making periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
d) calculating the amount to report for defined benefit expense.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
13. All of the following items create accounting problems for pension plans, except for
a) determining the level of individual premiums.
b) reporting the status and effects of the plan in the financial statements.
c) allocating the cost of the plan to the proper periods.
d) measuring the amount of pension obligation.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
14. In pension accounting, the actuary’s main purpose is to
a) make predictions about mortality rates and employee turnover.
b) calculate the current pension cost.
c) calculate the interest cost of the pension plan.
d) ensure the employer has established an appropriate funding pattern to meet its pension obligations.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. In Canada, employer-sponsored pension plans are
a) increasingly defined contribution.
b) increasingly defined benefit.
c) decreasingly defined contribution.
d) staying relatively the same.
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
16. Under IFRS, the defined benefit obligation for accounting purposes is
a) the present value of vested and non-vested benefits earned to the statement of financial position date, with the benefits measured using employees’ future salary levels.
b) the present value of vested and non-vested benefits earned to the statement of financial position date, with the benefits measured using employees’ current salary levels.
c) the present value of vested benefits only earned to the statement of financial position date, with the benefits measured using employees’ future salary levels.
d) the present value of non-vested benefits only earned to the statement of financial position date, with the benefits measured using employees’ future salary levels.
Difficulty: Hard
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
17. Which statement is INCORRECT regarding vested benefits?
a) There is usually a certain minimum number of years of service.
b) The employee is entitled to receive such benefits even if they are terminated.
c) Benefits are not contingent upon additional service under the plan.
d) Benefits are lost when the employee is terminated.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
18. The defined benefit obligation is always increased by
a) current service cost and payments to retirees.
b) current service cost and interest cost.
c) interest cost and actuarial gains.
d) current service cost and past service costs.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
19. For defined benefit plans, the attribution period for employees is the time between
a) the hire date and the vesting date.
b) the vesting date and the date the employee becomes eligible for full benefits.
c) the hire date and the date the employee becomes eligible for full benefits.
d) the hire date and the date the employee reaches 65.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
20. An experience gain or loss (adjustment) is
a) additional contributions made to the pension fund by the employer.
b) additional contributions made to the pension fund by the employees.
c) reduced payments made to retirees.
d) the difference between what has occurred and the previous actuarial assumptions.
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
21. Methods of measuring the pension obligation include all of the following, except for the
a) vested benefit method.
b) accumulated benefit method.
c) total benefit method.
d) projected benefit method.
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
22. The defined benefit obligation is always decreased by
a) benefits paid to retirees.
b) past service costs.
c) benefits paid to retirees and interest costs.
d) past service costs and interest costs.
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
23. The interest cost included in the annual pension cost recorded by an employer sponsoring a defined benefit pension plan represents the
a) difference between the expected and actual return on plan assets.
b) increase in the defined benefit obligation due to the passage of time.
c) increase in the fair value of plan assets due to the passage of time.
d) interest earned on the plan assets for the year.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
24. Which of the following reflects the treatment of actuarial gains/losses under ASPE?
a) Actuarial gains/losses are amortized to defined benefit expense through the corridor approach.
b) Actuarial gains/losses are recognized at 100% as incurred.
c) A policy choice can be made to either amortize actuarial gains/losses through the corridor approach, or to recognize 100% as incurred.
d) None of the choices are correct.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
25. Which of the following circumstances would normally be a contributing factor in the increase of a company’s pension liabilities?
a) an increase in interest rates
b) a decrease in interest rates
c) a decrease in the number of employees covered by the plan
d) an increase in the vesting period
Difficulty: Easy
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
26. The following information pertains to Rembrandt Inc.'s pension plan for calendar 2023:
Defined benefit obligation at Jan. 1 $96,000
Interest (discount) rate 10%
Current service costs $24,000
Pension benefits paid retirees $20,000
The corporation uses IFRS. If no change in actuarial estimates occurred during 2023, Rembrandt's defined benefit obligation at December 31, 2023 would be
a) $85,600.
b) $100,000.
c) $105,600.
d) $109,600.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $96,000 + $24,000 + ($96,000 × 10%) – $20,000 = $109,600
27. Who assumes the economic risk for defined benefit pension plans?
a) actuaries
b) trustees
c) employees
d) employers
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
28. Pension plan assets include
a) contributions made by the employer and the employees in a contributory pension plan.
b) plan assets under the control of the employer.
c) only assets reported on the employer’s statement of financial position as the net defined benefit liability/asset.
d) contribution by the employer/employees, less the actual return, plus benefits paid to retirees.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
29. The return on plan assets
a) is the change in the fair value of the plan assets during the year.
b) includes interest, dividends, and gains or losses from the sale of investments.
c) is the actual rate of return times the fair value of the plan assets at the beginning of the period.
d) does not include unrealized gains and/or losses on the assets in the plan.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
30. All of the following increase the value of plan assets, except the
a) employee contributions, if applicable.
b) employer contributions.
c) actual returns.
d) benefits paid to retirees.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
31. The difference between the defined benefit obligation and the pension assets’ fair value at any point in time is known as the plan’s
a) return on plan assets.
b) surplus or deficit.
c) experience gain or loss.
d) actual return.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
32. When a pension plan is underfunded,
a) it has more assets than liabilities.
b) it has more liabilities than assets.
c) it has higher net income.
d) it has lower net income.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
33. When the plan assets of a pension plan are greater than the defined benefit obligation, the pension plan is
a) overstated.
b) understated.
c) overfunded.
d) underfunded.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
34. Peach Corporation uses IFRS. Presented below is information related to Peach Corporation’s defined benefit pension plan for calendar 2023:
Defined benefit obligation, January 1 $200,000
Fair value of plan assets, January 1 180,000
Current service cost 27,000
Contributions to plan 25,000
Actual and expected return on plan assets 9,000
Benefits paid to retirees 40,000
Interest (discount) rate 10%
The fair value of the plan assets at December 31, 2023, is
a) $ 187,000.
b) $ 174,000.
c) $ 165,000.
d) $ 149,000.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
Feedback: $180,000 + $9,000 + $25,000 – $40,000 = $174,000
AACSB: Analytic
35. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023:
Defined benefit obligation, January 1 $720,000
Fair value of plan assets, January 1 700,000
Current service cost 90,000
Contributions to plan 125,000
Actual and expected return on plan assets 56,000
Past service costs (effective January 1) 10,000
Benefits paid to retirees 96,000
Interest (discount) rate 9%
The fair value of the plan assets at December 31, 2023, is
a) $785,000.
b) $805,000.
c) $819,000.
d) $875,000.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
Feedback: $700,000 + $56,000 + $125,000 – $96,000 = $785,000
AACSB: Analytic
36. Raphael Inc. provides a defined benefit plan for its employees, and reports using ASPE. The pension plan administrator for Raphael Inc. provided the following information for the year ended December 31, 2023:
Fair value of plan assets, January 1 $760,000
Defined benefit obligation, January 1 820,000
Current service cost 60,000
Employer contributions 85,000
Benefits paid to retirees 50,000
Actual and expected return 12,000
Interest (discount) rate 6%
The fair value of the plan assets at December 31, 2023, would be
a) $807,000.
b) $867,000.
c) $907,000.
d) $967,000.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
Feedback: $760,000 + $85,000 + $12,000 – $50,000 = $807,000
AACSB: Analytic
37. At January 1, 2023, Van Gogh Corp.’s defined benefit pension plan, under IFRS, had a defined benefit obligation of $100,000, while the fair value of the plan assets was $120,000. During 2023, the plan's current service cost was $150,000; past service costs were $80,000; Van Gogh contributed $110,000 to the plan; the actual and expected return on the plan assets was $9,000; and benefits paid to retirees were $95,000. What is the fair value of the plan assets at December 31, 2023?
a) $239,000
b) $205,000
c) $144,000
d) $135,000
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
Feedback: $120,000 + $9,000 + $110,000 – $95,000 = $144,000
AACSB: Analytic
38. Bateman Corp. provides a defined benefit pension plan for its employees and uses IFRS. The trustee administering the plan provided the following information for the year ended December 31, 2023:
Fair value of plan assets, Jan. 1 $1,200,000
Defined benefit obligation, Jan. 1 1,270,000
Current service cost 300,000
Employer's contributions 360,000
Past service cost (at Jan. 1) 30,000
Benefits paid to retirees 325,000
Actual and expected return 60,000
Interest (discount) rate 8%
The fair value of the plan assets at December 31, 2023, would be
a) $1,235,000.
b) $1,295,000.
c) $1,335,000.
d) $1,535,000.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,200,000 + $60,000 + $360,000 – $325,000 = $1,295,000
39. Markham Corp. provides a defined benefit pension plan for its employees and uses IFRS. The trustee administering the plan provided the following information for the year ended December 31, 2023:
Fair value of plan assets, December 31 $1,295,000
Defined benefit obligation, Jan. 1 1,270,000
Current service cost 300,000
Employer's contributions 360,000
Past service cost (at Jan. 1) 30,000
Benefits paid to retirees 325,000
Actual and expected return 60,000
Interest (discount) rate 8%
What was the fair value of the plan assets at January 1, 2023?
a) $1,200,000
b) $1,315,000
c) $1,335,000
d) $1,390,000
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,295,000 – $60,000 – $360,000 + $325,000 = $1,200,000
40. Kumquat Ltd. uses IFRS. Presented below is information related to Kumquat Ltd. for calendar 2023:
Defined benefit obligation, January 1 $ 720,000
Fair value of plan assets, December 31 785,000
Current service cost 90,000
Contributions to plan 125,000
Actual and expected return on plan assets 56,000
Past service costs (effective January 1) 10,000
Benefits paid to retirees 96,000
Interest (discount) rate 9%
The fair value of the plan assets at January 1, 2023, was
a) $870,000.
b) $812,000.
c) $700,000.
d) $604,000.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 785,000 – $56,000 – $125,000 + $96,000 = $700,000
41. Under IFRS, the defined benefit obligation is adjusted to its most recent actuarial valuation, and the adjustment flows through
a) other comprehensive income.
b) net income.
c) either other comprehensive income or net income.
d) retained earnings.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
42. Under IFRS, any difference between the defined benefit expense and the payments into the fund should be reflected in
a) a contra account to the net defined benefit liability/asset.
b) an accrued actuarial liability.
c) the net defined benefit liability/asset.
d) a note to the financial statements only.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
43. Any past service costs should be included in the
a) defined benefit expense of current and future periods.
b) defined benefit expense of past periods.
c) defined benefit expense of the current period.
d) plan assets.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
44. Under IFRS, a net defined benefit asset is reported when
a) the defined benefit obligation exceeds the fair value of pension plan assets.
b) the fair value of pension plan assets exceeds the defined benefit obligation.
c) the defined benefit expense for the period is the same as the contributions made to the pension plan for the same period.
d) the vested benefits exceed the fair value of pension plan assets.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
45. Under IFRS,
a) there is a general ledger account called Net Defined Benefit Liability/Asset.
b) there is a general ledger account called Defined Benefit Obligation.
c) there is a general ledger account called Pension Fund Assets.
d) defined benefit expense is included in other comprehensive income.
Difficulty: Easy
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
46. All past service costs are expensed. The rationale for doing this is that
a) the costs are usually immaterial.
b) the costs relate to non-vested services, so there is no justification for deferring their recognition to future periods.
c) the costs relate to past services, so there is no justification for deferring their recognition to future periods.
d) CRA will not allow the costs to be deferred.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
47. A difference between IFRS and ASPE’s recognition of the defined benefit cost components is
a) gains and losses from remeasurement of the net defined benefit liability or asset are reported in net income under ASPE.
b) gains and losses from remeasurement of the net defined benefit liability or asset are reported in net income under IFRS.
c) ASPE can use the defer and amortize approach.
d) IFRS can use the defer and amortize approach.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
48. The items included in the defined benefit cost are
a) service cost, net interest or finance cost, actuarial gains or losses.
b) service cost, net interest or finance cost, past service costs, actuarial gains or losses.
c) service cost, net interest or finance cost, remeasurement gain or loss on plan assets, past service costs, actuarial gains or losses.
d) service cost, remeasurement gain or loss on plan assets, actuarial gains or losses.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
49. Magritte Inc. provides a defined benefit pension plan for its employees (for which the corporation uses IFRS). At December 31, 2023, the fair value of the plan assets is less than the defined benefit obligation. In its statement of financial position at December 31, 2023, Magritte should report a net defined benefit liability/asset of the
a) excess of the defined benefit obligation over the fair value of the plan assets.
b) excess of the plan assets over the defined benefit obligation.
c) defined benefit obligation.
d) fair value of the plan assets.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
50. Presented below is pension information related to Sofa Inc. for the calendar year 2023:
Current service costs $288,000
Interest on accrued benefit obligation 216,000
Expected and actual return on plan assets 72,000
Past service costs 48,000
The defined benefit expense to be reported for 2023 is
a) $432,000.
b) $480,000.
c) $576,000.
d) $648,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $288,000 + $216,000 + $48,000 – $72,000 = $480,000
51. Presented below is pension information related to Banana Inc. for the calendar year 2023. The corporation uses ASPE.
Current service costs $ 50,000
Contributions to the plan 55,000
Actual return on plan assets 45,000
Accrued benefit obligation (beginning of year) 600,000
Fair value of plan assets (beginning of year) 400,000
Interest cost on the obligation 10%
The defined benefit expense to be reported for 2023 is
a) $110,000.
b) $70,000.
c) $65,000.
d) $50,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $50,000 + ($600,000 × 10%) – $45,000 = $65,000
52. Cantaloupe Ltd. uses ASPE. Presented below is pension information related to Cantaloupe Ltd. for the calendar year 2023:
Current service costs $450,000
Actual return on plan assets 105,000
Interest on accrued benefit obligation 195,000
Actuarial experience loss 45,000
Past service costs 82,500
The defined benefit expense to be reported for 2023 is
a) $757,500.
b) $697,500.
c) $667,500.
d) $577,500.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $450,000 + $195,000 + $45,000 + $82,500 – $105,000 = $667,500
53. At the end of 2023, Lime Inc. has determined the following information related to its defined benefit pension plan
Defined benefit obligation $1,320,000
Fair value of pension plan assets 1,220,000
The corporation uses IFRS. Assume the net defined benefit liability/asset account at January 1, 2023 was nil. If the contribution to plan assets in 2023 is $ 410,000, the defined benefit expense for 2023 is
a) $100,000.
b) $310,000.
c) $410,000.
d) $510,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: funding minus defined benefit expense = accrued pension asset/liab.
$410,000 – X = $1,220,000 – $1,320,000; X = $510,000
54. The following information is available for Figgy Enterprises Ltd. for calendar 2023. The corporation uses IFRS.
Plan assets (at fair value), end of year $1,800,000
Defined benefit obligation, end of year 1,920,000
Defined benefit expense 360,000
Contributions for year 324,000
The defined benefit expense to be reported for 2023 is
a) $360,000.
b) $346,000.
c) $324,000.
d) $120,000.
Difficulty: Easy
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 360,000 (given)
55. The following information is available for Figgy Enterprises Ltd. for calendar 2023. The corporation uses IFRS.
Plan assets (at fair value), end of year $1,800,000
Defined benefit obligation, end of year 1,920,000
Defined benefit expense 360,000
Contributions for year 324,000
The net defined benefit liability/asset that should be reported at December 31, 2023 is
a) $120,000 asset.
b) $120,000 liability.
c) $204,000 asset.
d) $360,000 liability.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,920,000 – $1,800,000 = $120,000 liability
56. Presented below is pension information related to Mango Ltd. at December 31, 2023. The corporation uses IFRS.
Defined benefit obligation $3,500,000
Plan assets (at fair value) 2,500,000
Past service costs 100,000
Contributions to plan 200,000
The amount to be reported as the net defined benefit liability at December 31, 2023, is
a) $1,100,000.
b) $1,000,000.
c) $900,000.
d) $700,000.
Difficulty: Easy
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $3,500,000 – $2,500,000 = $1,000,000
57. Presented below is pension information related to Squash Corp. for the calendar year 2023. The corporation uses IFRS.
Current service cost $204,000
Discount (interest) rate 9%
Defined benefit obligation, January 1 $1,800,000
Benefits paid to retirees 100,000
Past service cost (effective January 1) 50,000
The defined benefit expense to be reported for 2023 is
a) $266,000.
b) $366,000.
c) $416,000.
d) $420,500.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $204,000 + [($1,800,000 + $50,000) x 9%)] + $50,000 = $420,500
58. Presented below is pension information related to Watermelon Corp. for the calendar year 2023. The corporation uses IFRS.
Current service cost $126,000
Discount (interest) rate 10%
Defined benefit obligation, January 1 $900,000
Actual and expected return on plan assets 24,000
Actuarial loss 28,000
The defined benefit expense to be reported for 2023 is
a) $220,000.
b) $192,000.
c) $164,000.
d) $130,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $126,000 + ($900,000 x 10%) – $24,000 = $192,000
Note: the actuarial loss is not part of defined benefit expense, but is charged to OCI.
59. Daikon Ltd. uses ASPE. Daikon Ltd. received the following information from its pension plan trustee concerning their defined benefit pension plan for calendar 2023:
Jan. 1, 2023 Dec. 31, 2023
Fair value of plan assets $2,100,000 $2,250,000
Accrued benefit obligation 2,400,000 2,580,000
For 2023, the current service cost is $180,000. The interest rate on the liability is 10% and the actual rate of return on plan assets is 9%. The defined benefit expense to be reported for 2023 is
a) $265,500.
b) $231,000.
c) $216,000.
d) $180,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $180,000 + ($2,400,000 × 10%) – ($2,100,000 × 9%) = $231,000
60. Peach Corporation uses IFRS. Presented below is information related to Peach Corporation’s defined benefit pension plan for calendar 2023:
Defined benefit obligation, January 1 $ 200,000
Fair value of plan assets, January 1 180,000
Current service cost 27,000
Contributions to plan 25,000
Actual and expected return on plan assets 9,000
Benefits paid to retirees 40,000
Interest (discount) rate 10%
The balance of the defined benefit obligation at December 31, 2023 is
a) $185,000.
b) $187,000.
c) $207,000.
d) $245,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $200,000 + $27,000 + ($200,000 x 10%) – $40,000 = $ 207,000
61. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023:
Defined benefit obligation, January 1 $720,000
Fair value of plan assets, January 1 700,000
Current service cost 90,000
Contributions to plan 125,000
Actual and expected return on plan assets 56,000
Past service costs (effective January 1) 10,000
Benefits paid to retirees 96,000
Interest (discount) rate 9%
The defined benefit expense to be reported for 2023 is
a) $140,000.
b) $109,700.
c) $108,800.
d) $60,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $90,000 + [($720,000 + $10,000) x 9%] + $10,000 – $56,000 = $109,700
62. Kiwi Ltd. uses IFRS. Presented below is information related to Kiwi Ltd. for calendar 2023:
Defined benefit obligation, January 1 $720,000
Fair value of plan assets, January 1 700,000
Current service cost 90,000
Contributions to plan 125,000
Actual and expected return on plan assets 56,000
Past service costs (effective January 1) 10,000
Benefits paid to retirees 96,000
Interest (discount) rate 9%
The balance of the defined benefit obligation at December 31, 2023 is
a) $724,000.
b) $779,700.
c) $778,800.
d) $789,700.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $720,000 + $10,000 + $90,000 + [($720,000 + $10,000) x 9%] – $96,000 = $789,700
63. At December 31, 2023, the following information was provided by the defined benefit pension plan administrator for Leonardo Corp.:
Fair value of plan assets $5,000,000
Defined benefit obligation 6,200,000
The corporation uses IFRS. What is the net defined benefit liability/asset account that should be shown on Leonardo’s December 31, 2023, statement of financial position?
a) $1,200,000 liability
b) $1,200,000 asset
c) $6,200,000 liability
d) $5,000,000 asset
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $6,200,000 – $5,000,000 = $1,200,000 liability
64. Thomson Corp. provides a defined benefit pension plan for its employees, and uses IFRS to account for it. The corporation's actuary has provided the following information for the year ended December 31, 2023:
Defined benefit obligation, December 31 525,000
Fair value of plan assets, December 31 625,000
Current service cost 240,000
Interest on defined benefit obligation 24,000
Past service costs 60,000
Expected and actual return on plan assets 82,500
Contributions to plan 200,000
The defined benefit expense to be reported for 2023 is
a) $241,500.
b) $324,000.
c) $406,500.
d) $524,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $240,000 + $24,000 – $82,500 + $60,000 = $241,500
65. Bateman Corp. provides a defined benefit pension plan for its employees, and uses IFRS to account for it. The trustee administering the plan provided the following information for the year ended December 31, 2023:
Fair value of plan assets, January 1 $1,200,000
Defined benefit obligation, January 1 1,270,000
Current service cost 300,000
Employer's contributions 360,000
Past service cost (at January 1) 30,000
Benefits paid retirees 325,000
Actual and expected return 60,000
Interest (discount) rate 8%
The defined benefit expense to be reported for 2023 is
a) $270,000.
b) $366,000.
c) $374,000.
d) $434,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $300,000 + $30,000 + [($1,270,000 + $30,000) x 8%] – $60,000 = $374,000
66. Presented below is pension information related to Lightning Ltd. for the calendar year 2023:
Current service costs $288,000
Interest on accrued benefit obligation 216,000
Expected and actual return on plan assets 72,000
Defined benefit expense reported for 2023 480,000
The past service cost for 2023 is
a) $336,000.
b) $264,000.
c) $120,000.
d) $48,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $480,000 – $288,000 –$216,000 + $72,000 = $48,000
67. Presented below is pension information related to Sofa Inc. for the calendar year 2023:
Current service costs $ 288,000
Defined benefit expense for 2023 480,000
Expected and actual return on plan assets 72,000
Past service costs 48,000
The interest on the accrued pension obligation for 2023 is
a) $312,000.
b) $216,000.
c) $168,000.
d) $144,000.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $480,000 – $288,000 – $48,000 + $72,000 = $216,000
68. Which of the following statements is INCORRECT?
a) Most pension plan employers report their pension assets or liabilities in the appropriate long-term classifications.
b) An employer with two or more defined benefit plans is required to measure the benefit cost of each plan separately.
c) IFRS specifies how the components of pension benefit costs are to be reported on the income statement.
d) Underlying assumptions, such as how the expected return on plan assets is determined, are required to be disclosed.
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
69. Post-employment benefits may include all of the following, except for
a) dental care.
b) severance pay to laid-off employees.
c) legal and tax services.
d) tuition assistance.
Difficulty: Easy
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
70. Which of the following statements regarding post-employment health-care benefits is correct?
a) Post-employment health-care benefit plans are generally funded.
b) Post-employment health-care benefit plans are well-defined and level in dollar amount.
c) Post-employment health-care benefit plan beneficiaries include the retiree, spouse, and other dependents.
d) Post-employment health-care benefits are payable monthly.
Difficulty: Easy
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
71. Accrued post-employment benefit obligations are
a) recorded at their present value.
b) recorded in the same manner as pension benefit obligations.
c) not recognized in the financial statements.
d) disclosed in the notes to the financial statements only.
Difficulty: Easy
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
72. How should employers recognize employee benefit plans that do NOT accumulate?
a) Recognize the liability and cost over the life of the employee.
b) Recognize the liability and cost over the length of service.
c) Recognize the liability and cost when the event occurs to obligate the company to provide the benefit.
d) Employers do not need to recognize them.
Difficulty: Easy
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
73. Under IFRS for employee future benefits besides pension plans, remeasurements of the net defined benefit
a) should be reflected in OCI.
b) should not be recorded.
c) do not need to be remeasured.
d) should be reflected in income.
Difficulty: Medium
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
74. Which of the following disclosures of post-employment benefits would NOT be required?
a) the cost of post-employment benefits during the period
b) a description of the accounting and funding policies followed
c) the amount of the actuarial liability for short-term benefits such as paternity leave
d) the assumptions and rates used in calculating the benefit obligation
Difficulty: Easy
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
75. Which of the following pieces of disclosure information would analysts NOT focus on?
a) the name of the actuarial company that performed the calculations
b) major assumptions used in the calculation of the defined benefit obligation
c) the surplus or deficit of the plan
d) the company’s future cash requirements
Difficulty: Easy
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
76. Under ASPE, which of the following disclosures of post-employment benefits would NOT be required?
a) a description of each type of plan
b) the effective date of the most recent actuarial report
c) the year-end surplus or deficit, including the fair value of the plan assets and defined benefit obligation
d) the risks associated with the defined benefit plan
Difficulty: Medium
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
77. Under IFRS, which one of the following pension items is recognized in the employer’s accounts and financial statements?
a) pension plan assets
b) unrecognized actuarial gains/losses
c) unrecognized past service costs
d) the plan’s funded status
Difficulty: Easy
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
78. Under ASPE, which of the following disclosures would NOT be required for a defined benefit plan?
a) the year-end funded status
b) a general description of the plan
c) sensitivity information for actuarial assumptions
d) the effective date of the most recent actuarial valuation
Difficulty: Easy
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
79. Under IFRS, all of the following are reported in OCI, except
a) remeasurement changes.
b) actuarial gains.
c) actuarial losses.
d) past service costs.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
80. According to standard setters, which of the following indicates a more realistic measure of the employer's obligation under a pension plan on a going-concern basis and should be used as the basis for determining service cost?
a) vested benefit obligation
b) projected benefit obligation
c) accumulated benefit obligation
d) None of the choices is correct.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
81. The major difference in accounting for pensions under ASPE and IFRS is
a) ASPE allows two approaches for accounting, immediate recognition approach and the deferral and amortization approach and IFRS only allows the immediate recognition approach.
b) IFRS requires use of an actuary and ASPE does not for calculating pension plan expense.
c) ASPE includes the entire defined benefit expense in net income and IFRS includes actuarial gains and losses as well as remeasurements in OCI.
d) IFRS includes the entire defined benefit expense in net income and ASPE includes actuarial gains and losses as well as remeasurements in OCI.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
*82. Maggie Moo, age 40, begins employment with Farm Corporation on January 1, 2023, at a starting salary of $40,000. It is expected that Maggie will work for the company for 25 years, retiring on December 31, 2047, when Maggie is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2047 is 12 years.
Farm Corporation sponsors a defined benefit pension plan with the following formula:
Annual pension benefit on retirement = 3% of salary at retirement for each year of service, or 3% final salary x years of service.
Assume a discount rate of 6%.
Determine the current service cost for Maggie Moo at December 31, 2023.
a) $4,200
b) $8,212.66
c) $8,696.69
d. $35,212.12
Difficulty: Hard
Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan.
Section Reference: Appendix 19A: Example of a One-Person Plan
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: 3% x $140,000 x 1 year = $4,200 per year of retirement, PV of $4,200 annuity
(n=12, i=6%) at December 31, 2047 = $4,200 x 8.38384 = $35,212.13, PV of
amount of $35,212.13(n=24, i=6%) at December 31, 2023 = $35,212.13 x 0.24698 = $8,696.69
*83. Maggie Moo, age 40, begins employment with Farm Corporation on January 1, 2023, at a starting salary of $40,000. It is expected that Maggie will work for the company for 25 years, retiring on December 31, 2047, when Maggie is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2047 is 12 years.
Farm Corporation sponsors a defined benefit pension plan with the following formula:
Annual pension benefit on retirement = 3% of salary at retirement for each year of service, or 3% final salary x years of service.
Assume a discount rate of 6%.
Determine the defined benefit obligation for Maggie Moo at December 31, 2024.
a) $8,400
b) $17,416.01
c) $18,437.07
d) $70,415.86
Difficulty: Hard
Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan.
Section Reference: Appendix 19A: Example of a One-Person Plan
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: PV of $8,400 annuity (n=12, i=6) at Dec 31, 2024 = $8,400 x 8.38384=$70,424.26
PV of $70,424.26 (n=23, i=6%) at Dec 31, 2024 = $70,424.26 x 0.26180 = $18,437.07
Exercises
Ex. 19-84 Post-employment benefits
There are a variety of post-employment benefits that are earned by employees and that are expected to be provided to them on a long-term basis.
Instructions
a) Identify and explain what types of benefits an employee may be entitled to.
b) How are these benefits funded?
c) CRITICAL THINKING: Given the potential cost and long-term obligation to an employer, why to companies provide these types of benefits to employees?
Solution 19-84
a) Post-employment benefits include:
- Post-retirement plans such as pensions and plans that provide health care or life insurance benefits after an employee’s retirement. A pension plan specifically is an arrangement in which an employer provides benefits (payments) to employees after they retire, for services that the employees provided while they were working.
- Post-employment plans with benefits that are provided after employment but before retirement. These include long-term disability income benefits, long-term severance benefits, and continuation of benefits such as health care and life insurance.
- Plans covering accumulating and vested compensated absences. This type of benefit includes payments made while an employee is absent from work. It also includes unrestricted sabbatical leaves and accumulated sick days that vest or are taken as paid vacation.
b) Benefits may be funded through contributory plans, where the employees pay part of the cost of the stated benefits or voluntarily make payments to increase their benefits. In non-contributory plans, the employer bears the entire cost.
c) CRITICAL THINKING: The job market for skilled and trained employees can be very competitive. If a company or organization is unable to compete to attract talent on salaries alone, benefits packages provide further incentive for employees to either initially accept a position or alternatively to stay in the position once they are already working for a firm.
Difficulty: Easy
Learning Objective: Understand the importance of pensions from a business perspective.
Section Reference: Overview of Pensions and Their Importance from a Business Perspective
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 19-85 Defined benefit plans
Pension plans can be broadly grouped into two categories: defined contribution plans and defined benefit plans.
Instructions
b) What type of obligations are created for companies with defined benefit plans? How is this reflected on the statement of financial position?
Solution 19-85
a) The (current) service cost component of defined benefit expense as part of the defined benefit plans is the cost of the benefits to be provided in future in exchange for services provided in the current period. The interest cost component of defined benefit expense is the interest for the period of the defined (accrued) benefit obligation outstanding during the period. To simplify the calculation, the amount of interest is calculated by applying a single rate to the beginning balance of the obligation.
When a defined benefit plan is initiated or amended, credit that is given to employees for services provided before the date of initiation or amendment results in past service costs. If there is a reduction in the benefit plan, there is a decrease in the defined (accrued) benefit obligation. The amount of the past service costs is calculated by an actuary, and is added/deducted to the beginning balance of the obligation for calculating the interest cost for the year.
Vested benefits are those the employee is entitled to receive even if they provide no additional services under the plan, e.g., if their employment is terminated. Vesting means that an employee keeps the rights to the benefit even if the employee no longer works for the entity. Typically, defined benefits vest with the employee based on the employee’s length of service. Normally, the benefits will vest after an employee has worked a specified number of years and the amount of the benefit typically increases with the length of service.
b) A liability is only reported on the employer’s SFP if the required contribution has not been made in full for a defined benefit plan. An asset is only reported if the employer has contributed more than the required amount to be contributed for a defined benefit plan.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-86 Pension plan assets
The assets or liabilities related to pension plans must be captured on a company’s statement of financial position.
Instructions
a) Explain how the actual returns on pension assets are generated.
b) How are the expected returns on a pension plan asset determined?
c) Can the pension plan assets generate gains or losses? If so, explain how.
d) CRITICAL THINKING: What is the role of the actuary? Is this role crucial in a defined benefit versus a defined contribution plan? Why or why not?
Solution 19-86
a) The actual return earned on plan assets is the income generated on the assets being held by the trustee, less the cost of administering the fund. This can vary considerably from year to year.
b) The expected return on plan assets is the long-term rate of return (calculated by the actuary) multiplied by the fair value of the assets at the beginning of the period. A long-term rate is used to smooth out short-term fluctuations in interest rates, and is usually the rate for high-quality corporate bonds. The return on plan assets can be highly variable from one year to the next, so actuaries ignore short-term fluctuations when they develop a funding pattern to accumulate assets to pay benefits in the future. Under IFRS, the same rate is used for interest on the defined benefit obligation and the plan assets.
c) 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.
d) CRITICAL THINKING: An actuary’s chief purpose in pension accounting is to ensure that the company has established an appropriate funding pattern to meet its pension obligations.
Actuaries make predictions called actuarial assumptions about mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and any other factors that need to be considered for pension plans. The role of the actuary is less crucial for a company with a defined contribution plan where the employee bears the risk of the plan’s performance.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-87 Pension plan calculations
The following information relates to the defined benefit pension plan for Strawberry Dale Ltd.:
Dec. 31/22 Dec. 31/23
Defined benefit obligation $2,250,000 $3,000,000
Fair value of plan assets $2,300,000 $2,640,000
Interest rate 8% 8%
Expected rate of return 7% 6%
In 2023, the corporation contributed $390,000 to the plan, and the trustee paid $210,000 in benefits to retirees.
Instructions
For the year ended December 31, 2023,
a) Calculate the interest on the obligation.
b) Calculate the actual return on plan assets.
c) Calculate the unexpected gain or loss (if any).
Solution 19-87
a) $2,250,000 × 8% = $180,000
b) Fair value of plan assets Dec. 31/23 $2,640,000
Fair value of plan assets Dec. 31/22 (2,300,000)
340,000
Contributions (390,000)
Benefits paid 210,000
Actual return on plan assets $ 160,000
c) Actual return (see b)) $160,000
Expected return ($2,300,000 × 6%) (138,000)
Unexpected gain $ 22,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-88 Pension plan calculations
The following information relates to the defined benefit pension plan for Strawberry Dale Ltd.:
Dec. 31/22 Dec. 31/23
Defined benefit obligation $750,000 $900,000
Fair value of plan assets 800,000 840,000
Interest rate 7% 7%
Expected rate of return 5% 5%
In 2023, the corporation contributed $190,000 to the plan, and the trustee paid $187,000 in benefits to retirees.
Instructions
For the year ended December 31, 2023,
a) Calculate the interest on the obligation.
b) Calculate the actual return on plan assets.
c) Calculate the unexpected gain or loss (if any).
d) CRITICAL THINKING: How is a discount rate determined under IFRS? Would this differ if a company is using ASPE? If so, explain how.
Solution 19-88
a) $750,000 × 7% = $52,500
b) Fair value of plan assets Dec. 31/23 $ 840,000
Fair value of plan assets Dec. 31/22 (800,000)
40,000
Contributions (190,000)
Benefits paid 187,000
Actual return on plan assets $ 37,000
c) Actual return (see b)) $ 37,000
Expected return ($800,000 × 5%) (40,000)
Unexpected loss $ 3,000
d) CRITICAL THINKING: IFRS’ current rate can only be the current yield on high-quality debt instruments such as high-quality corporate bonds. The same discount rate is used for plan assets and the DBO.
ASPE’s current rate can either be the current yield on debt instruments (such as high-quality corporate bonds) or a current settlement rate. The same discount rate is used for plan assets and the DBO.
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-89 Pension plan calculations and journal entries
On January 1, 2023, Prune Ltd. reported the following balances relating to their defined benefit pension plan:
Defined benefit obligation $ 3,200,000
Fair value of plan assets 3,200,000
Other data related to the pension plan for 2023 are:
Current service cost 140,000
Contributions to the plan 204,000
Benefits paid 220,000
Actual return on plan assets 192,000
Interest (discount) rate 9%
Instructions
a) Calculate the defined benefit obligation at December 31, 2023.
b) Calculate the fair value of plan assets at December 31, 2023.
c) Calculate defined benefit expense for 2023.
d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023.
Solution 19-89
a) Defined benefit obligation, January 1 $3,200,000
Current service cost 140,000
Interest cost (9% × $3,200,000) 288,000
Benefits paid (220,000)
Defined benefit obligation, December 31 $3,408,000
b) Fair value of plan assets, January 1 $3,200,000
Actual return 192,000
Contributions 204,000
Benefits paid (220,000)
Fair value of plan assets, December 31 $3,376,000
c) Current service cost $140,000
Interest cost (9% × $3,200,000) 288,000
Actual return on plan assets (192,000)
Defined benefit expense $236,000
d) Defined Benefit Expense 236,000
Net Defined Benefit Liability/Asset 236,000
Net Defined Benefit Liability/Asset 204,000
Cash 204,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-90 Different methods of measuring pension obligation
Discuss the different methods of measuring the pension obligation and identify which method is used for IFRS and ASPE.
Solution 19-90
Actuaries calculate the vested benefit obligation using vested benefits only, at current salary levels, under the vested benefit method.
The accumulated benefit method is based on both the vested and non-vested benefits and calculated on all years of employees’ service using the current salary levels.
The projected benefit method calculates the deferred compensation using both vested and non-vested service, and incorporates future salaries projected to be earned over the period to retirement.
IFRS and ASPE have both adopted the projected benefit method to calculate the defined benefit obligation (DBO).
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-91 Defined benefit obligation continuity schedule
Provide the defined benefit obligation (DBO) continuity schedule.
Solution 19-91
Defined benefit obligation (DBO), beginning of the period
+ Current service cost
+ Interest cost
– Benefits paid to retirees
+/– Past service costs of plan amendments during period
+/– Actuarial gains (–) or losses (+) during the period
= Defined benefit obligation (DBO), end of the period
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-92 Plan assets continuity schedule
Provide the plan assets continuity schedule.
Solution 19-92
Plan assets, fair value at beginning of period
+ Contributions from employer company, and employees if applicable
+/– Actual return
– Benefits paid to retirees
= Plan assets, fair value at end of period
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-93 Calculate plan surplus or deficit
Star Company calculated its defined benefit obligation at December 31, 2023, to be $975,000. The fair value of the plan assets on the same date was $545,000.
Instructions
Calculate Star Company’s plan surplus or deficit and explain what the surplus or deficit means.
Solution 19-93
DBO $975,000
Less: Fair value of the plan assets (545,000)
DBO > Plan assets $430,000 underfunded
Star Company’s plan is in a deficit, which means its liability is greater than its assets so the plan is underfunded. If Star Company’s financial performance is poor, there could be an issue with having enough funds to cover the future pension costs.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-94 Calculate plan surplus or deficit
Sunshine Company calculated its defined benefit obligation at December 31, 2023, to be $2,590,000. The fair value of the plan assets on the same date was $2,685,000.
Instructions
Calculate Sunshine Company’s plan surplus or deficit and explain what the surplus or deficit means.
Solution 19-94
DBO $ 2,590,000
Less: Fair value of the plan assets (2,685,000)
DBO < Plan assets $ 95,000 overfunded
Sunshine Company’s plan is in a surplus, which means its assets are greater than its liability so the plan is overfunded. Sunshine Company can fully cover its pension obligation.
Difficulty: Easy
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-95 Components of defined benefit expense
Explain the five components of defined benefit expense under IFRS
Solution 19-95
Current service costs – benefits earned by the employees during the current period. This is included in the defined benefit expense on the statement of comprehensive income.
Net interest (or finance) cost – the discount rate used for the interest cost on the DBO and for the interest assumed to be earned on the plan assets. This is included in the defined benefit expense on the statement of comprehensive income.
Remeasurement of the return on plan assets other than net interest costs on the DBO are recognized in OCI.
Past service costs, curtailments, and settlements – plan amendments instantly change the amount of the employer’s obligation, and the total cost (or benefit) of the amendment is recognized immediately in the defined benefit expense on the statement of comprehensive income.
Actuarial gains and losses – result from items such as changes in actuarial assumptions and experience adjustments that increase or decrease the present value of the DBO. Actuarial gains and losses are recognized immediately in OCI.
Difficulty: Medium
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
Ex. 19-96 Measuring and recording defined benefit expense
Pumpkin Ltd. received the following information from its pension plan trustee concerning their defined benefit pension plan for the year ended December 31, 2023
January 1, 2023 December 31, 2023
Defined benefit obligation $3,500,000 $3,990,000
Fair value of plan assets 1,750,000 1,882,000
For 2023, the service cost is $210,000 and past service cost (effective Jan. 1) is $100,000. During 2023, Pumpkin contributed $595,000 to the plan. The actual and expected return on plan assets is 8%. Pumpkin uses IFRS.
Instructions
a) Calculate the defined benefit expense to be reported in 2023.
b) Prepare the journal entries to record the defined benefit expense and the employer’s contribution for 2023.
Solution 19-96
a) Current service cost $210,000
Interest on DBO ($3,500,000 + $100,000) × 8%) 288,000
Actual/expected return on plan assets ($1,750,000 × 8%) (140,000)
Past service costs 100,000
Defined benefit expense—2023 $458,000
b) Defined Benefit Expense 458,000
Net Defined Benefit Liability/Asset 458,000
Net Defined Benefit Liability/Asset 595,000
Cash 595,000
Difficulty: Hard
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-97 Measuring and recording defined benefit expense
The following information relates to the defined benefit pension plan for Huckleberry Ltd. for 2023. The corporation uses IFRS.
Current service cost $260,000
Contributions 250,000
Interest rate for obligation 10%
Expected and actual return on plan assets 9%
Defined benefit obligation, Jan. 1 240,000
Fair value of plan assets, Jan. 1 180,000
Actuarial gain 24,000
Instructions
a) Calculate the defined benefit expense to be reported for 2023.
b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023.
Solution 19-97
a) Current service cost $260,000
Interest on defined benefit obligation ($240,000 × 10%) 24,000
Expected return on plan assets ($180,000 × 9%) (16,200)
Defined benefit expense—2023 $267,800
Note that the actuarial gain is not part of defined benefit expense, but would be booked through OCI.
b) Defined Benefit Expense 267,800
Net Defined Benefit Liability/Asset 267,800
Net Defined Benefit Liability/Asset 250,000
Cash 250,000
Difficulty: Hard
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-98 Measuring and recording defined benefit expense
The following information relates to the defined benefit pension plan for Strawberry Ltd. for 2023. The corporation uses ASPE.
Current service cost $348,000
Contributions 321,000
Interest rate for obligation 9%
Expected and actual return on plan assets 8%
Defined benefit obligation, Jan. 1 367,000
Fair value of plan assets, Jan. 1 225,000
Actuarial loss 10,000
Instructions
a) Calculate the defined benefit expense to be reported for 2023.
b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023.
Solution 19-98
a) Current service cost $348,000
Interest on defined benefit obligation ($367,000 × 9%) 33,030
Expected return on plan assets ($225,000 × 8%) (18,000)
Actuarial loss 10,000
Defined benefit expense—2023 $373,030
b) Defined Benefit Expense 373,030
Net Defined Benefit Liability/Asset 373,030
Net Defined Benefit Liability/Asset 321,000
Cash 321,000
Difficulty: Hard
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-99 Measuring and recording defined benefit expense
Tang Ltd. uses ASPE. The following information relates to the defined benefit pension plan for Tang Ltd. for 2023:
Defined benefit obligation, Jan. 1 $1,147,000
Fair value of plan assets, Jan. 1 1,225,000
Current service cost 314,000
Contributions 290,000
Interest rate for obligation 7%
Expected and actual return on plan assets 6%
Actuarial gain 26,000
Instructions
a) Calculate the defined benefit expense to be reported for 2023.
b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023.
Solution 19-99
a) Current service cost $314,000
Interest on defined benefit obligation ($1,147,000 × 7%) 80,290
Expected return on plan assets ($1,225,000 × 6%) (73,500)
Actuarial gain (26,000)
Defined benefit expense—2023 $294,790
b) Defined Benefit Expense 294,790
Net Defined Benefit Liability/Asset 294,790
Net Defined Benefit Liability/Asset 290,000
Cash 290,000
Difficulty: Hard
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-100 Measuring and recording defined benefit expense
Orange Ltd. uses ASPE. The following information relates to the defined benefit pension plan for Orange Ltd. for 2023:
Current service cost $590,000
Contributions 495,000
Interest rate for obligation 10%
Expected and actual return on plan assets 8%
Past service costs – amendment to plan Dec. 31 100,000
Defined benefit obligation, Jan. 1 602,000
Fair value of plan assets, Jan. 1 550,000
Benefits paid 470,000
Actuarial loss 20,000
Instructions
a) Calculate the defined benefit expense to be reported for 2023.
b) Prepare the journal entries to record the defined benefit expense and the employer's contributions for 2023.
Solution 19-100
a) Current service cost $590,000
Interest on defined benefit obligation ($602,000 × 10%) 60,200
Expected return on plan assets ($550,000 × 8%) (44,000)
Past service costs 100,000
Actuarial loss 20,000
Defined benefit expense—2023 $726,200
b) Defined Benefit Expense 726,200
Net Defined Benefit Liability/Asset 726,200
Net Defined Benefit Liability/Asset 495,000
Cash 495,000
Difficulty: Hard
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-101 Differences between pensions and other post-employment health-care benefits
Discuss the differences between pensions and other post-employment health-care benefits in terms of funding, benefits, beneficiary, benefits payable, and predictability.
Solution 19-101
Item | Pensions | Health-Care Benefits |
Funding | Generally funded | Generally not funded |
Benefits | Well-defined and level dollar amount | Generally uncapped and great variability |
Beneficiary | Retiree (maybe some benefit to surviving spouse) | Retiree, spouse, and other dependants |
Benefits payable | Monthly | As needed and used |
Predictability | Variables are reasonably predictable | Utilization difficult to predict; level of cost varies geographically and fluctuates over time |
Difficulty: Medium
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 19-102 Accounting for defined benefit plans other than pension plans under ASPE and IFRS
How are pension and non-pension defined benefits plans that vest or accumulate accounted for under ASPE and under IFRS?
Solution 19-102
Under ASPE, only one approach is permitted; the immediate recognition approach with defined benefit expense being recorded via net income. Any non-pension defined benefit plans that vest or accumulate are accounted for in the same way as defined benefit pension plans.
Under IFRS, only one approach is permitted; with current and past service cost, and the net interest on the net employee benefit liability or asset being recorded in net income (and with gains and losses from remeasurements being recorded in OCI). The short-term employee benefits are generally recognized (without discounting) at the amount expected to be paid in exchange for the services provided. Other long-term benefits require the same recognition and measurement as for pension plans except all changes in liabilities relating to these benefits should be reflected in income, including remeasurement. IFRS requires the cost of the benefits to be recognized at the earlier of when the company can no longer withdraw an offer of employment and when it recognizes the related restructuring costs.
Difficulty: Medium
Learning Objective: Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Section Reference: Other Defined Benefit Plans
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 19-103 Analyzing disclosure requirements
Given there is a significant amount of information included in the notes to the financial statements on pensions, what should an analyst focus on and why?
Solution 19-103
The most significant elements for review in the notes to the financial statements are the major assumptions that underlie the calculations, the surplus or deficit of the plan, and the company’s future cash requirements.
If the major assumptions change, this can significantly change the amounts within the defined benefit obligation and the defined benefit expense. For example, a one percent point difference in the discount rate could have a 10% to 20% effect on the discounted value. The rate used is disclosed so users can assess for reasonableness and compare to rates used by other companies.
The cash flow related to pensions is important as it is often significantly different from the pension cost recognized on the income statement and analysts often try to determine the company’s future cash commitments.
Difficulty: Medium
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. for 19-104 Disclosure requirements
What disclosure requirements are necessary for pensions under ASPE? What disclosure requirements are necessary for pensions under IFRS?
Solution 19-104
Disclosure requirements for ASPE
- A description of each type of plan and any major changes in the terms of the plan during the year.
- The effective date of the most recent actuarial valuation for funding purposes.
- The year-end surplus or deficit, including the fair value of the plan assets and defined benefit obligation.
- An explanation of any difference between the amount reported on the balance sheet and the plan’s surplus or deficit.
- If not shown separately on the income statement, “remeasurements and other items” should be disclosed in notes.
Disclosure requirements for IFRS
1. The characteristics of the defined benefit plans and risk associated with them.
2. The amounts in the statements arising from the plans.
3. How the defined benefit plans help them assess the amounts, timing, and likelihood of the cash flows that are associated with future benefits (IFRS 19.125).
In addition to a description of each defined benefit plan, IFRS also requires:
1. Reconciliations of opening to closing balances of the present value of the net defined benefit liability/asset, plan assets, and the present value of the DBO.
2. Amounts included in the periodic net income, the amount included in expenses, such as current service cost, interest expense, and return on plan assets, along with amounts recognized in OCI such as actuarial gains and losses from changes in assumptions.
3. Sensitivity information for each significant actuarial assumption including the impact on the DBO and changes from the previous period in methods and assumptions used in the sensitivity analysis.
Difficulty: Medium
Learning Objective: Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Section Reference: Presentation, Disclosure, and Analytics
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 19-105 Calculate current service costs
Joe Smith, age 45, begins employment with Square Corporation on January 1, 2023, at a starting salary of $45,000. It is expected that Joe will work for the company for 20 years, retiring on December 31, 2042, when Joe is 65 years old. It is expected that his salary at retirement will be $120,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2042 is 12 years.
Square Corporation sponsors a defined benefit pension plan with the following formula
Annual pension benefit on retirement = 2% of salary at retirement for each year of service, or 2% final salary x years of service.
Assume a discount rate of 6%.
Instructions
a) Determine the current service cost for Joe Smith at December 31, 2023.
b) CRITICAL THINKING: The CFO is reviewing your calculations and thinks there must be an error. He believes that this value is too low given Joe’s salary of $45,000. Explain how the current service cost is calculated. Briefly explain how this is similar to the calculations for the defined pension obligation and past service costs.
*Solution 19-105
a) Annual pension benefit on retirement = 2% x $120,000 x 1 year = $2,400 per year on retirement
PV of $2,400 annuity (n=12, i=6) at December 31, 2042 = $2,400 x 8.38384 = $20,121.22
(Table A.4)
PV of amount of $20,121.22 (n=19, i=6%) at December 31, 2023 = $20,121,22 x 0.33051
= $6,650.26
(Table A.2)
The current service cost for Joe Smith is $6,650.26.
b) CRITICAL THINKING: The current service cost is a calculation of the present value of the benefits earned by employees that is attributable to the current period. The use of a discount rate is also applied to the calculation of the defined benefit obligation and past service costs. The defined benefit obligation is the present value of the accumulated benefits earned to a point in time, according to the pension formula and using projected salaries, while past service cost is the present value of the additional benefits granted to employees in the case of a plan amendment.
Difficulty: Hard
Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan.
Section Reference: Appendix 19A: Example of a One-Person Plan
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
*Ex. 19-106 Calculate current service costs
Suzanne Hannah, age 55, begins employment with Young Corporation on January 1, 2023, at a starting salary of $65,000. It is expected that Suzanne will work for the company for 10 years, retiring on December 31, 2032, when Suzanne is 65 years old. It is expected that her salary at retirement will be $140,000. Further assume that mortality tables indicate the life expectancy of someone age 65 in 2032 is 12 years.
Young Corporation sponsors a defined benefit pension plan with the following formula
Annual pension benefit on retirement = 2% of salary at retirement for each year of service, or 2% final salary x years of service.
Assume a discount rate of 5%.
Instructions
Determine the current service cost for Suzanne Hannah at December 31, 2023.
*Solution 19-106
Annual pension benefit on retirement = 2% x $140,000 x 1 year = $2,800 per year of retirement
PV of $2,400 annuity (n=12, i=5) at December 31, 2032 = $ 2800 x 8.86325 = $24,817
(Table A.4)
PV of amount of $24,817 (n=9, i=5%) at December 31, 2023 = $24,817 x 0.64461 = $15,997.29
(Table A.2)
The current service cost for Suzanne Hannah is $15,997.29.
Difficulty: Hard
Learning Objective: Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan.
Section Reference: Appendix 19A: Example of a One-Person Plan
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 19-107 Measuring and recording defined benefit expense
On January 1, 2023, Wang Ltd. reported the following balances relating to its defined benefit pension plan:
Dec. 31, 2023 Jan. 1, 2023
Defined benefit obligation (a) $1,200,000
Fair value of plan assets (b) 1,170,000
Current service cost $ 95,000
Contributions to the plan 104,000
Benefits paid 100,000
Actual return on plan assets 92,000
Interest (discount) rate 8%
Defined benefit expense (c)
Instructions
a) Calculate the defined benefit obligation at December 31, 2023.
b) Calculate the fair value of plan assets at December 31, 2023.
c) Calculate the defined benefit expense for 2023.
d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023.
Solution 19-107
a) Defined benefit obligation, January 1 $1,200,000
Current service cost 95,000
Interest cost (8% × $1,200,000) 96,000
Benefits paid (100,000)
Defined benefit obligation, December 31 $1,291,000
b) Fair value of plan assets, January 1 $1,170,000
Actual return 92,000
Contributions 104,000
Benefits paid (100,000)
Fair value of plan assets, December 31 $1,266,000
c) Current service cost $95,000
Interest cost (8% × $1,200,000) 96,000
Actual return on plan assets (92,000)
Defined benefit expense $99,000
d) Defined Benefit Expense 99,000
Net Defined Benefit Liability/Asset 99,000
Net Defined Benefit Liability/Asset 104,000
Cash 104,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-108 Calculating discount rate and actual return on plan assets
On January 1, 2023, Lillibet Ltd. reported the following balances relating to its defined benefit pension plan:
Dec. 31, 2023 Jan. 1, 2023
Defined benefit obligation $1,291,000 $1,200,000
Fair value of plan assets 1,266,000 1,170,000
Current service cost 95,000
Contributions to the plan 104,000
Benefits paid 100,000
Actual return on plan assets (b)
Interest (discount) rate (a)
Defined benefit expense (c)
Instructions
a) Calculate the discount rate.
b) Calculate the actual return on plan assets.
c) Calculate the defined benefit expense for 2023.
d) Prepare the journal entries to record the defined benefit expense and the contributions for 2023.
Solution 19-108
a) Defined benefit obligation, December 31 $1,291,000
Defined benefit obligation, January 1 (1,200,000)
Current service cost (95,000)
Benefits paid 100,000
Interest cost 96,000
$96,000 / $1,200,000 = .08 or 8%
b) Fair value of plan assets, December 31 $1,266,000
Fair value of plan assets, January 1 (1,170,000)
Contributions (104,000)
Benefits paid…………………………………………………. 100,000
Actual return 92,000
1,170,000 + X + 104,000 – 100,000 = 1,266,000
X = 1,266,000 – 1,170,000 – 104,000 + 100,000 = 92,000
c) Current service cost $95,000
Interest cost (8% × $1,200,000) 96,000
Actual return on plan assets (92,000)
Defined benefit expense $99,000
d) Defined Benefit Expense 99,000
Net Defined Benefit Liability/Asset 99,000
Net Defined Benefit Liability/Asset 104,000
Cash 104,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-109 Measuring and recording defined benefit expense – IFRS
Swiss Chard Ltd. uses IFRS. Presented below is information related to the defined benefit pension plan of Swiss Chard Ltd. for the year 2023:
Defined benefit obligation, January 1 $ 375,000
Fair value of plan assets, January 1 350,000
Current service cost 300,000
Interest (discount) rate 10%
Expected and actual return on plan assets 9%
Past service cost (as of January 1) 25,000
Actuarial loss 14,900
Contributions to plan 290,000
Remeasurement loss on plan assets 11,500
Payments to retirees 250,000
Instructions
a) Calculate the defined benefit expense to be reported on the income statement for 2023.
b) Calculate the amount to be shown as OCI for 2023.
c) Calculate the fair value of the plan assets at December 31, 2023.
d) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023.
Solution 19-109
a) Current service cost $300,000
Interest on DBO [(10% × ($ 375,000 + $ 25,000)] 40,000
Expected and actual return on plan assets (9% × $ 350,000) (31,500)
Past service cost 25,000
Defined benefit expense $333,500
b) Actuarial loss $14,900
Remeasurement loss on plan assets 11,500
Amount to be shown as OCI (Dr.) $26,400
c) Fair value of plan assets, January 1 $350,000
Expected and actual return on plan assets 31,500
Remeasurement loss on plan assets (11,500)
Contributions to plan 290,000
Payments to retirees (250,000)
Fair value of plan assets, December 31 $410,000
d) Defined Benefit Expense 333,500
Net Defined Benefit Liability/Asset 333,500
Remeasurement Loss (OCI) 26,400
Net Defined Benefit Liability/Asset 26,400
Net Defined Benefit Liability/Asset 290,000
Cash 290,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-110 Measuring and recording defined benefit expense – ASPE
Swiss Kale Ltd. uses ASPE. Presented below is information related to the defined benefit pension plan of Swiss Kale Ltd. for the year 2023:
Defined benefit obligation, January 1 $375,000
Fair value of plan assets, January 1 350,000
Current service cost 300,000
Interest (discount) rate 10%
Expected and actual return on plan assets 9%
Past service cost (as of January 1) 25,000
Actuarial loss 14,900
Contributions to plan 290,000
Remeasurement loss on plan assets 11,500
Payments to retirees 250,000
Instructions
a) Calculate the defined benefit expense to be reported on the income statement for 2023.
b) Calculate the fair value of the plan assets at December 31, 2023.
c) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023.
Solution 19-110
a) Current service cost $300,000
Interest on DBO [(10% × ($ 375,000 + $ 25,000)] 40,000
Expected and actual return on plan assets (9% × $ 350,000) (31,500)
Past service cost 25,000
Actuarial loss 14,900
Remeasurement loss on plan assets 11,500
Defined benefit expense $359,900
b) Fair value of plan assets, January 1 $350,000
Expected and actual return on plan assets 31,500
Remeasurement loss on plan assets (11,500)
Contributions to plan 290,000
Payments to retirees (250,000)
Fair value of plan assets, December 31 $410,000
c) Defined Benefit Expense 359,900
Net Defined Benefit Liability/Asset 359,900
Net Defined Benefit Liability/Asset 290,000
Cash 290,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-111 Calculating defined benefit expense and pension plan surplus or deficit
Fernando’s Furniture Inc. sponsors a defined benefit pension plan for its employees. The plan’s trustee reports the following information for calendar 2023:
Defined benefit obligation, January 1 $240,000
Fair value of plan assets, January 1 180,000
Current service cost 80,000
Actual and expected return on plan assets 21,000
Contributions 70,000
Benefits paid to retirees 120,000
Interest (discount) rate 10%
Past service costs (as of January 1) 10,000
The corporation uses ASPE.
Instructions
a) Calculate the amount of the defined benefit expense for 2023, and prepare the required adjusting entries.
b) Calculate the surplus or deficit of the plan on December 31, 2023.
Solution 19-111
a) Defined benefit expense for 2023
Current service cost $80,000
Interest on DBO [(10% x ($ 240,000 + $ 10,000)] 25,000
Actual and expected return on plan assets (21,000)
Past service cost 10,000
Defined benefit expense $94,000
Defined Benefit Expense....................................... 94,000
Net Defined Benefit Liability/Asset…….................................... 94,000
Net Defined Benefit Liability/Asset.................................... 70,000
Cash......................................................................... 70,000
b) Funded Status at December 31, 2023
Defined Benefit Obligation (1) $(235,000)
Plan assets (2) 151,000
Underfunded $ (84,000)
(1) Defined benefit obligation
Beginning balance $240,000
Service cost 80,000
Interest cost 25,000
Past service cost 10,000
Payments to retirees (120,000)
Ending balance $235,000
(2) Plan assets
Beginning balance $180,000
Actual return 21,000
Contributions 70,000
Payments to retirees (120,000)
Ending balance $151,000
Difficulty: Medium
Learning Objective: Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Section Reference: Defined Benefit Obligation
Learning Objective: Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit.
Section Reference: Plan Assets and Plan Surplus or Deficit
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-112 Preparation of a pension work sheet and pension entries
Vernhey Ltd., which follows ASPE, provides the following information about its defined benefit pension plan for the year 2023:
Current service cost | $ 144,000 |
Contribution to the plan | 182,600 |
Past service cost, effective December 31, 2023 | 60,000 |
Actual return on plan assets | 160,000 |
Benefits paid | 95,000 |
Net defined benefit liability at January 1, 2023 | 20,000 |
Plan assets at January 1, 2023 | 1,780,000 |
Defined benefit obligation at January 1, 2023 | 1,800,000 |
Interest/discount rate on the DBO and plan assets | 9% |
Instructions
- Complete the pension work sheet below for 2023. Indicate credit entries by parentheses, e.g., (25,000).
- Prepare all journal entries.
- What is the amount of the plan’s surplus/deficit at December 31, 2023?
VERHEY LTD.
Pension Work Sheet
Year ended December 31, 2023
General Journal Entry | Memo Record | ||||
| Annual Defined Benefit Expense | Cash | Net Defined Benefit Liability/ Asset | Defined Benefit Obligation | Plan Assets |
Balance January 1, 2023 | (20,000) | (1,800,000) | 1,780,000 | ||
Current service cost | |||||
Past service cost | |||||
Net interest /finance cost | |||||
Benefits paid | |||||
Contribution | |||||
Expense entry | |||||
Contribution entry 2023 | |||||
Balance December 31, 2023 | |||||
Solution 19-112
a)
VERHEY LTD.
Pension Work Sheet
Year ended December 31, 2023
General Journal Entry | Memo Record | ||||
| Annual Defined Benefit Expense | Cash | Net Defined Benefit Liability/ Asset | Defined Benefit Obligation | Plan Assets |
Balance January 1, 2023 | (20,000) | (1,800,000) | 1,780,000 | ||
Current service cost | 144,000 | (144,000) | |||
Past service cost | 60,000 | (60,000) | |||
Net interest /finance cost1 | 2,000 | (162,000) | 160,000 | ||
Benefits paid | 95,000 | (95,000) | |||
Contribution |
| 182,600 | 182,600 | ||
Expense entry | 206,000 |
| (206,000) | ||
Contribution entry 2023 | (182,600) | 182,600 | |||
Balance December 31, 2023 |
| (43,400) | (2,071,000) | 2,027,600 | |
1 ($1,800,000 x 9%) = $ 162,000
b) Defined Benefit Expense 206,000
Net Defined Benefit Liability/Asset 206,000
Net Defined Benefit Liability/Asset 182,600
Cash 182,600
c) Calculation of plan surplus/deficit, December 31, 2023:
Defined benefit obligation $(2,071,000)
Plan assets at fair value 2,027,600
Plan deficit $ (43,400)
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 19-113 Preparation of a pension work sheet and pension entries
The accountant for Camberwell Ltd. has developed the following information regarding the company's defined benefit pension plan for calendar 2023:
Service cost $ 600,000
Actual return on plan assets 315,000
Contributions 1,080,000
Benefits paid to retirees 72,000
Interest (discount) rate 10%
Instructions
a) Using the above information, complete the pension work sheet below for 2023. Indicate credit entries by parentheses, e.g., (72,000).
b) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ended December 31, 2023.
CAMBERWELL LTD.
Pension Work Sheet
Year ended December 31, 2023
General Journal Entries Memo Record
——————————————————————————————————————————
Annual Net Defined Defined
Defined Benefit Benefit Benefit Plan
Expense Cash Liability/Asset/ Obligation Assets
——————————————————————————————————————————
Bal. December 31, 2022 (1,200,000) (4,500,000) 3,300,000
Service cost
Interest cost
Actual return
Contributions
Benefits paid
Journal entry for 2023 ______ ______ ______ ______ ______
Bal. December 31, 2023 ______ ______ ______ ______ ______
Solution 19-113
a)
CAMBERWELL LTD.
Pension Work Sheet
Year ended December 31, 2023
General Journal Entries Memo Record
——————————————————————————————————————————
Annual Net Defined Defined
Defined Benefit Benefit Benefit Plan
Expense Cash Liability/Asset Obligation Assets
——————————————————————————————————————————
Bal. December 31, 2022 (1,200,000) (4,500,000) 3,300,000
Service cost 600,000 (600,000)
Interest cost (1) 450,000 (450,000)
Actual return (315,000) 315,000
Contributions (1,080,000) 1,080,000
Benefits paid __________ 72,000 (72,000)
Expense entry 735,000 (735,000)
Contribution entry (1,080,000) 1,080,000
Bal. December 31, 2023 (855,000) (5,478,000) 4,623,000
(1) $4,500,000 × 10% = $450,000
b) Defined Benefit Expense 735,000
Net Defined Benefit Liability/Asset 735,000
Net Defined Benefit Liability/Asset 1,080,000
Cash 1,080,000
Difficulty: Medium
Learning Objective: Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE.
Section Reference: Defined Benefit Cost Components
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
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