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CHAPTER 19
PENSIONS AND OTHER
EMPLOYEE FUTURE BENEFITS
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE AND
LEVEL OF DIFFICULTY
Item
LO
LOD
Item
1.
2.
3.
4.
5.
6.
7.
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1
1,4
2
3
3
3
3
3
M
E
E
E
M
M
M
H
9.
10.
11.
12.
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31.
32.
33.
34.
35.
36.
37.
5
5
7
7
7
7
7
M
M
M
M
M
H
E
38.
39.
40.
41.
42.
43.
44.
58.
59.
60.
4
4,7
5
M
M
M
61.
62.
63.
68.
69.
70.
71.
4
4,5
4,5
4,5,7
M
M
M
M
72.
73.
74.
*75.
81.
82.
4,5,7
4,6,7
M
M
83.
*84.
Note:
E = Easy
LO LOD Item
LO
LOD
Multiple Choice–Conceptual
4
H
17.
7
M
4
M
18.
7
M
4
M
19.
7
M
4
M
20.
7
M
4
M
21.
7
M
5
M
22.
7
M
5
M
23.
7
M
6
E
24.
7,9
M
Multiple Choice–Computational
7
M
45.
7
M
7
E
*46.
11
M
7
H
*47.
12
H
7
M
*48.
12
H
7
H
*49.
12
H
7
M
*50.
12
H
7
M
*51.
12
M
Multiple Choice–CPA Adapted
5
M
64.
7
M
7
E
65.
7
E
7
M
*66.
12
M
Exercises
7
M
*76.
12
M
7
M
*77.
12
H
7
M
*78.
12
M
12
M
*79.
12
M
Problems
7
M
*85.
12
M
12
M
M = Medium
Item
LO
LOD
25.
26.
27.
28.
*29.
*30.
8
8
8,9
9
12
12
M
M
M
H
M
M
*52.
*53.
*54.
*55.
*56.
*57.
12
12
12
12
12
12
M
M
H
M
M
H
*67.
12
M
*80.
12
M
H = Hard
*This topic is dealt with in an Appendix to the chapter.
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19- 2
Test Bank for Intermediate Accounting, Tenth Canadian Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type
1.
MC
Item
Type
2.
MC
Item Type Item Type
Learning Objective 1
Item
Type
Item
Type
Learning Objective 2
3.
MC
4.
MC
5.
MC
2.
9.
10.
MC
MC
MC
11.
12.
13.
MC
MC
MC
14.
15.
MC
MC
31.
32.
MC
MC
16.
MC
82.
Pr
17.
18.
19.
20.
21.
22.
MC
MC
MC
MC
MC
MC
23.
24.
34.
35.
36.
37.
MC
MC
MC
MC
MC
MC
25.
MC
26.
MC
24.
MC
27.
MC
46.
MC
*29.
*30.
*47.
*48.
MC
MC
MC
MC
Learning Objective 3
6.
MC
7.
MC
Learning Objective 4
58.
MC
69.
Ex
59.
MC
70.
Ex
68.
Ex
71.
Ex
Learning Objective 5
60.
MC
69.
Ex
61.
MC
70.
Ex
Learning Objective 6
Learning Objective 7
38.
MC
44.
MC
39.
MC
45.
MC
40.
MC
59.
MC
41.
MC
62.
MC
42.
MC
63.
MC
43.
MC
64.
MC
Learning Objective 8
27.
MC
Learning Objective 9
8.
MC
81.
82.
Pr
Pr
71.
81.
Ex
Pr
65.
71.
72.
73.
74.
81.
MC
Ex
Ex
Ex
Ex
Pr
82.
83.
Pr
Pr
*76.
*77.
*78.
*79.
Ex
Ex
Ex
Ex
*80.
*84.
*85.
Ex
Pr
Pr
Learning Objective 11
Note:
*49.
*50.
*51.
*52.
MC
MC
MC
MC
MC = Multiple Choice
Learning Objective 12
*53.
MC
*57.
MC
*54.
MC
*66.
MC
*55.
MC
*67.
MC
*56.
MC
*75.
Ex
Ex = Exercise
Pr = Problem
*This topic is dealt with in an Appendix to the chapter.
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Pensions and Other Employee Future Benefits
19- 3
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) in relation to companies’ financial position, results of
operations, and cash flows. With the vast majority of defined benefit plans being underfunded,
more and more companies are moving toward defined contribution plans.
2. Identify and account for a defined contribution benefit plan. Defined contribution plans are
plans that specify how contributions are determined rather than what benefits the individual will
receive. They are accounted for similar to a cash basis.
3. Identify and explain what a defined benefit plan is and the related accounting issues.
Defined benefit plans specify the benefits that the employee is entitled to. 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.
4. 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 the deferral and amortization approach under ASPE.
The funding approach specified by legislation is the measurement of the obligation under ASPE’s
immediate recognition approach. The DBO is increased by current service cost, interest cost, 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.
5. Identify transactions and events that change benefit plan assets, and calculate the
balance of the assets. 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.
6. Explain what a benefit plan’s funded status is, calculate it, and identify what
transactions and events change its amount. A plan’s funded status 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
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19- 4
Test Bank for Intermediate Accounting, Tenth Canadian Edition
payments to retirees change the funded status.
7. Identify the components of pension expense, and account for a defined benefit pension
plan under the immediate recognition approach. Pension expense under the immediate
recognition approach is a function of: (1) service cost, (2) interest on the liability, (3) actual return
on plan assets, (4) past service costs, and (5) net actuarial gains or losses. Under ASPE, all are
immediately included in current expense in their entirety. The pension obligation amount is
determined under a funding basis measure. Under IFRS, pension costs relating to current
service, past service, and net interest on the net defined benefit obligation are included in pension
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 OCI.
8. 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 the same recognition and measurement for these long-term benefits as for pension
plans. Specifically, changes in the liabilities related to these benefits should be reflected in
income. 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.
9. 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 ABO, and the funded status and
how this relates to the balance sheet account. 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 help determine
cash flows.
10. Identify differences between the IFRS and ASPE accounting for employee future
benefits and what changes are expected in the near future. IAS 19 is broader based and
covers more employee benefits than does CICA Handbook, Part II, Section 3461. ASPE permits a
choice of the immediate recognition approach or the deferral and amortization approach, whereas
IFRS permits only the former approach, but with options within it. With recent changes to IAS 19,
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 OCI. At the present time, ASPE still allows companies to
use the deferral and amortization approach, although this option is expected to be eliminated
eventually.
11. Explain and apply basic calculations to determine current service cost, the defined
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Pensions and Other Employee Future Benefits
19- 5
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.
12. Identify the components of pension benefit cost, and account for a defined benefit
pension plan when using the deferral and amortization approach under ASPE; determine
the pension plan accounts reported in the financial statements and explain their
relationship to the funded status of the plan. Pension cost under the deferral and amortization
approach is a function of: (1) service cost, (2) interest on the liability, (3) expected return on plan
assets, (4) past service costs, and (5) net actuarial gain or loss. Items (1) to (3) are included in
current expense entirely, while items (4) and (5) are usually recognized through a process of
amortization. The unamortized balances of items (4) and (5) are reported in the notes to the
financial statements. An accrued benefit liability or asset is reported in the balance sheet. Under
the deferral and amortization approach, the balance is equal to the funded status adjusted for any
unamortized past service costs and unamortized actuarial gains and losses. The pension
expense is reported in the income statement.
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19- 6
Test Bank for Intermediate Accounting, Tenth Canadian Edition
MULTIPLE CHOICE—Conceptual
Answer
c
d
c
b
b
c
a
d
a
d
b
c
d
a
b
b
a
c
c
b
a
c
a
c
b
c
b
c
b
d
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
*29.
*30.
Description
Employee future benefits
Pension funding and pension expense recognition
Nature of a defined contribution plan
Nature of a defined benefit plan
Objective of accounting for defined benefit plans
Meaning of funding a pension plan
Accounting problems in pension plans
Main purpose of an actuary
Definition of defined benefit obligation
Characteristics of vested benefits
Increase in defined/accrued benefit obligation
Definition of attribution period
Definition of experience gain or loss
Nature of plan assets
Nature of return on plan assets
Plan funded status
Adjustment for actuarial valuations
Application of immediate recognition approach
Recognition of past service costs using immediate recognition approach
Recognition of net defined benefit asset
G/L accounts under immediate recognition approach
Rationale for expensing past service costs using immediate recognition
Advantage of immediate recognition approach
Identify correct statement.
Post-employment benefits
Post-employment benefits
Recording/disclosure of post-employment benefit obligations
Disclosure of post-employment benefits
Unrecognized actuarial gains/losses using deferral and amortization
approach.
Corridor amortization
*This topic is dealt with in an Appendix to the chapter.
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Pensions and Other Employee Future Benefits
19- 7
MULTIPLE CHOICE—Computational
Answer
b
a
b
c
c
d
a
b
b
d
b
b
c
b
d
c
b
b
d
c
d
c
c
b
a
b
b
No.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
*46.
*47.
*48.
*49.
*50.
*51.
*52.
*53.
*54.
*55.
*56.
*57.
Description
Calculate fair value of plan assets.
Calculate fair value of plan assets.
Calculate pension expense.
Calculate pension expense.
Calculate pension expense.
Calculate pension expense.
Calculate pension expense.
Calculate net defined benefit liability/asset.
Calculate net defined benefit liability/asset.
Calculate pension expense.
Calculate pension expense.
Calculate pension expense.
Calculate defined benefit obligation.
Calculate pension expense.
Calculate defined benefit obligation.
Calculate post-employment benefit expense.
Calculate accrued pension liability/asset.
Calculate actuarial gain/loss.
Calculate accrued pension liability/asset.
Calculate actuarial gain/loss.
Calculate accrued benefit obligation.
Calculate fair value of plan assets.
Calculate interest cost.
Calculate actual return on plan assets.
Calculate unexpected gain/loss.
Calculate corridor.
Calculate unrecognized actuarial gain/loss to be amortized.
MULTIPLE CHOICE—CPA Adapted
Answer
b
d
c
b
a
a
c
a
d
c
No.
58.
59.
60.
61.
62.
63.
64.
65.
*66.
*67.
Description
Nature of interest cost included in pension cost
Calculate defined benefit obligation.
Calculate fair value of plan assets.
Calculate fair value of plan assets.
Calculate net defined benefit liability/asset.
Calculate pension expense.
Calculate pension expense.
Reporting net defined benefit liability/asset
Calculate accrued benefit liability/asset.
Calculate pension plan funded status.
*This topic is dealt with in an Appendix to the chapter.
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19- 8
Test Bank for Intermediate Accounting, Tenth Canadian Edition
EXERCISES
Item
E19-68
E19-69
E19-70
E19-71
E19-72
E19-73
E19-74
*E19-75
*E19-76
*E19-77
*E19-78
*E19-79
*E19-80
Description
Pension accounting terminology
Pension asset terminology
Pension plan calculations
Pension plan calculations and journal entries
Approaches to accounting for pension expense
Measuring and recording pension expense.
Measuring the recording pension expense
Corridor amortization
Pension plan calculations and journal entries
Corridor approach for amortization of actuarial gains and losses
Pension reconciliation schedule
Calculating and recording pension expense.
Calculating accrued pension liability/asset.
PROBLEMS
Item
P19-81
P19-82
P19-83
*P19-84
*P19-85
Description
Measuring and recording pension expense.
Calculating pension expense and funded status.
Preparation of a pension work sheet and pension entries
Amortization of past service costs using EARSL
Preparation of a pension work sheet and pension entries (deferral and
amortization approach)
*This topic is dealt with in an Appendix to the chapter.
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Pensions and Other Employee Future Benefits
19- 9
MULTIPLE CHOICE—Conceptual
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.
2. The relationship between the amount funded and the amount reported for pension expense is
that
a. pension expense must always equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
3. In a defined contribution plan, a formula is used that
a. defines the benefits that the employee will receive at retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.
4. 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 pension expense and the cash funding amount to 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.
5. 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.
6. 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 pension expense.
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19- 10
Test Bank for Intermediate Accounting, Tenth Canadian Edition
7. Accounting problems for all pension plans may include all the following EXCEPT
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.
8. 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.
9. 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.
10. Which statement is INCORRECT regarding vested benefits?
a. They usually require a certain minimum number of years of service.
b. The employee is entitled to receive such benefits even if s/he is fired.
c. They are not contingent upon additional service under the plan.
d. They are lost when the employee is terminated.
11. The defined benefit obligation (accrued benefit obligation under ASPE) 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.
12. 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.
13. An experience gain or loss 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.
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Pensions and Other Employee Future Benefits
19- 11
d. the difference between what has occurred and the previous actuarial assumptions.
14. 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.
15. 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.
16. The difference between the defined (accrued) 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. funded status.
c. experience gain or loss.
d. actual return.
17. 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.
18. In applying the immediate recognition approach under IFRS, any difference between the
pension 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.
19. Using the immediate recognition approach, any past service costs should be included in the
a. pension expense of current and future periods.
b. pension expense of past periods.
c. pension expense of the current period.
d. plan assets.
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19- 12
Test Bank for Intermediate Accounting, Tenth Canadian Edition
20. Using the immediate recognition approach 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 pension 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.
21. Using the immediate recognition approach 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. Pension Expense is included in other comprehensive Income.
22. Under the immediate recognition approach, all past service costs are expensed. The rationale
for doing this is that
a. they are usually immaterial.
b. they relate to non-vested services, so there is no justification for deferring their recognition
to future periods.
c. they relate to past services, so there is no justification for deferring their recognition to
future periods.
d. CRA will not allow them to be deferred.
23. An advantage of the immediate recognition approach (IFRS) is that
a. the Net Defined Benefit Liability/Asset account reflects the actual funded status of the
pension plan.
b. unrecognized past service costs are deferred and amortized over future periods.
c. it averages out the pension expense from year to year.
d. it does not recognize actuarial gains and losses.
24. 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.
25. Post-employment benefits may include all of the following EXCEPT
a. dental care.
b. severance pay to laid-off employees.
c. legal and tax services.
d. tuition assistance.
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Pensions and Other Employee Future Benefits
19- 13
26. Regarding post-employment health care benefits,
a. they are generally funded.
b. they are well-defined and level in dollar amount.
c. the beneficiary is the retiree, spouse, and other dependents.
d. benefits are payable monthly.
27. 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.
28. 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
*29. Using the deferral and amortization approach, unrecognized net actuarial gains and losses
should be
a. recorded currently as an adjustment to pension expense in the period incurred.
b. recorded currently and in the future by applying the corridor method which provides the
amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.
*30. Corridor amortization for net actuarial gains and losses
a. only applies when the immediate recognition approach is used.
b. can be used for either the immediate recognition approach or the deferral and amortization
approach.
c. is only used by the actuary.
d. amortizes the net accumulated gain or loss when its balance is considered too large.
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19- 14
Test Bank for Intermediate Accounting, Tenth Canadian Edition
MULTIPLE CHOICE ANSWERS—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
c
d
c
b
b
Item
6.
7.
8.
9.
10.
Ans.
c
a
d
a
d
Item
11.
12.
13.
14.
15.
Ans.
b
c
d
a
b
Item
16.
17.
18.
19.
20.
Ans.
b
a
c
c
b
Item
21.
22.
23.
24.
25.
Ans.
Item
Ans.
a
c
a
c
b
26.
27.
28.
*29.
*30.
c
b
c
b
d
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Pensions and Other Employee Future Benefits
19- 15
MULTIPLE CHOICE—Computational
31. Presented below is information related to Peach Corporation’s defined benefit pension plan
for calendar 2014. The corporation uses the immediate recognition approach under IFRS.
Defined benefit obligation, Jan 1 ................................ $200,000
Fair value of plan assets, Jan 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, 2014 is
a. $187,000.
b. $174,000.
c. $165,000.
d. $149,000.
32. Presented below is information related to Kiwi Ltd. for calendar 2014. The corporation uses
the immediate recognition approach under IFRS.
Defined benefit obligation, Jan 1 ................................ $720,000
Fair value of plan assets, Jan 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 Jan 1) ............................
10,000
Benefits paid to retirees..............................................
96,000
Interest (discount) rate ...............................................
9%
The fair value of the plan assets at December 31, 2014 is
a. $785,000.
b. $805,000.
c. $819,000.
d. $875,000.
33. Presented below is pension information related to Apple Inc. for the calendar year 2014. The
corporation uses the immediate recognition approach.
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 pension expense to be reported for 2014 is
a. $432,000.
b. $480,000.
c. $576,000.
d. $648,000.
34. Presented below is pension information related to Banana Inc. for the calendar year 2014.
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19- 16
Test Bank for Intermediate Accounting, Tenth Canadian Edition
The corporation uses the immediate recognition approach under 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 pension expense to be reported for 2014 is
a. $110,000.
b. $ 70,000.
c. $ 65,000.
d. $ 50,000.
35. Presented below is pension information related to Cantaloupe Ltd. for the calendar year 2014.
The corporation uses the immediate recognition approach under ASPE.
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 pension expense to be reported for 2014 is
a. $757,500.
b. $697,500.
c. $667,500.
d. $577,500.
36. At the end of 2014, Lime Inc. has determined the following adjusted 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 the immediate recognition approach under IFRS. Assume the net defined
benefit liability/asset account at January 1, 2014 was nil. If the contribution to plan assets in 2014
is $410,000, the pension expense for 2014 is
a. $100,000.
b. $310,000.
c. $410,000.
d. $510,000.
Use the following information for questions 37–38.
The following information is available for Figgy Enterprises Ltd. for calendar 2014. The
corporation uses the immediate recognition approach under IFRS.
Plan assets (at fair value), end of year ....................... $1,800,000 Dr
Defined benefit obligation, end of year ....................... 1,920,000 Cr
Pension expense........................................................
360,000
Contributions for year .................................................
324,000
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Pensions and Other Employee Future Benefits
19- 17
37. The pension expense to be reported for 2014 is
a. $360,000.
b. $346,000.
c. $324,000.
d. $120,000.
38. The net defined benefit liability/asset that should be reported at December 31, 2014 is
a. $120,000 asset.
b. $120,000 liability.
c. $204,000 asset.
d. $360,000 liability.
39. Presented below is pension information related to Mango Ltd. at December 31, 2014. The
corporation uses the immediate recognition approach under IFRS.
Defined benefit obligation ........................................... $3,500,000 Cr
Plan assets (at fair value) ........................................... 2,500,000 Dr
Past service costs ......................................................
100,000
Contributions to plan ..................................................
200,000
The amount to be reported as the net defined benefit liability at December 31, 2014 is
a. $1,100,000.
b. $1,000,000.
c. $ 900,000.
d. $ 700,000.
40. Presented below is pension information related to Squash Corp. for the calendar year 2014.
The corporation uses the immediate recognition approach under IFRS.
Current service cost ................................................... $204,000
Discount (interest) rate ...............................................
9%
Defined benefit obligation, Jan 1 ................................ $1,800,000
Benefits paid to retirees..............................................
100,000
Past service cost (effective Jan 1) ..............................
50,000
The pension expense to be reported for 2014 is
a. $266,000.
b. $366,000.
c. $416,000.
d. $420,500.
41. Presented below is pension information related to Watermelon Corp. for the calendar year
2014. The corporation uses the immediate recognition approach under IFRS.
Current service cost ................................................... $126,000
Discount (interest) rate ...............................................
10%
Defined benefit obligation, Jan 1 ................................ $900,000
Actual & expected return on plan assets ....................
24,000
Actuarial loss..............................................................
28,000
The pension expense to be reported for 2014 is
a. $220,000.
b. $192,000.
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19- 18
Test Bank for Intermediate Accounting, Tenth Canadian Edition
c. $164,000.
d. $130,000.
42. Daikon Ltd. received the following information from its pension plan trustee concerning their
defined benefit pension plan for calendar 2014. The corporation uses the immediate recognition
approach under ASPE.
Jan 1, 2014
Dec 31, 2014
Fair value of plan assets
$2,100,000
$2,250,000
Accrued benefit obligation
2,400,000
2,580,000
For 2014, 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 pension expense to be reported for 2014 is
a. $265,500.
b. $231,000.
c. $216,000.
d. $180,000.
43. Presented below is information related to Peach Corporation’s defined benefit pension plan
for calendar 2014. The corporation uses the immediate recognition approach under IFRS.
Defined benefit obligation, Jan 1 ................................ $200,000
Fair value of plan assets, Jan 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, 2014 is
a. $185,000.
b. $187,000.
c. $207,000.
d. $245,000.
Use the following information for questions 44–45.
Presented below is information related to Kiwi Ltd. for calendar 2014. The corporation uses the
immediate recognition approach under IFRS.
Defined benefit obligation, Jan 1 ................................ $720,000
Fair value of plan assets, Jan 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 Jan 1) ............................
10,000
Benefits paid to retirees..............................................
96,000
Interest (discount) rate ...............................................
9%
44. The pension expense to be reported for 2014 is
a. $140,000.
b. $109,700.
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Pensions and Other Employee Future Benefits
19- 19
c. $108,800.
d. $ 60,000.
45. The balance of the defined benefit obligation at December 31, 2014 is
a. $724,000.
b. $779,700.
c. $778,800.
d. $789,700.
*46. The following facts relate to the Tomato Inc. post-employment benefits plan for 2014. The
company follows ASPE:
Current service cost ................................................... $340,000
Discount (interest) rate ...............................................
8%
Accrued benefit obligation, Jan 1, 2014
(transitional amount) .................................................. $2,000,000
Average remaining service to full eligibility .................
20 years
Average remaining service to expected retirement .....
25 years
The post-employment benefit expense for 2014 is
a. $612,000.
b. $600,000.
c. $580,000.
d. $420,000.
Use the following information for questions *47–*50.
The following information relates to Gooseberry Corp. for their past two fiscal years. The
corporation uses the deferral and amortization approach.
2013
2014
Plan assets (at fair value) ..................... $630,000
$912,000
Pension expense..................................
285,000
225,000
Accrued benefit obligation ....................
810,000
942,000
Annual contribution to plan ...................
300,000
225,000
Unrecognized past service costs ..........
240,000
210,000
*47. The net amount to be recorded as accrued pension liability/asset at December 31, 2013 is
a. $ -0-.
b. $15,000 Dr.
c. $15,000 Cr.
d. $40,000 Dr.
*48. The amount of the actuarial gain/loss at December 31, 2013 is
a. $45,000 loss.
b. $45,000 gain.
c. $60,000 gain.
d. $180,000 loss.
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19- 20
Test Bank for Intermediate Accounting, Tenth Canadian Edition
*49. Assuming the amortization of past service costs is already included in the pension expense,
the amount reported as the accrued pension liability/asset at December 31, 2014 is
a. $ -0-.
b. $30,000.
c. $45,000.
d. $15,000.
*50. The amount of the actuarial gain/loss at December 31, 2014 is
a. $195,000 gain.
b. $180,000 gain.
c. $165,000 gain.
d. $ 30,000 gain.
Use the following information for questions *51–*52.
On January 1, 2014, Quince Inc. reported the following balances related to their defined benefit
pension plan. The corporation uses the deferral and amortization approach.
Accrued benefit obligation .......................................... $1,400,000
Fair value of plan assets ............................................ 1,250,000
The interest rate for the obligation and the plan assets is 10%. Other data related to the pension
plan for 2014 are:
Service cost ...............................................................
$80,000
Amortization of unrecognized past service costs ........
18,000
Contributions ..............................................................
90,000
Benefits paid ..............................................................
75,000
Actual return on plan assets .......................................
88,000
Amortization of unrecognized net actuarial gains .......
6,000
*51. The balance of the accrued benefit obligation at December 31, 2014 is
a. $1,524,000.
b. $1,530,000.
c. $1,543,000.
d. $1,545,000.
*52. The fair value of the plan assets at December 31, 2014 is
a. $1,177,000.
b. $1,263,000.
c. $1,353,000.
d. $1,428,000.
Use the following information for questions *53–*57.
The following information relates to the defined benefit pension plan for the employees of
Raspberry Ltd. The corporation uses the deferral and amortization approach.
Jan 1/13
Dec 31/13
Dec 31/14
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Pensions and Other Employee Future Benefits
Accrued benefit obligation
Fair value of plan assets
Unrecognized net actuarial gain
Interest cost on ABO
Expected rate of return
2,325,000
2,125,000
-0-
2,490,000
2,600,000
360,000
11%
8%
19- 21
3,335,000
2,870,000
400,000
11%
7%
Raspberry estimates that the employee average remaining service life (EARSL) is 16 years. In
2014, Raspberry contributed $315,000 to the pension fund, and the fund trustee paid $235,000 in
benefits to retirees.
*53. The interest cost for 2014 is
a. $224,100.
b. $253,000.
c. $273,900.
d. $366,850.
*54. The actual return on plan assets in 2014 is
a. $170,000.
b. $190,000.
c. $245,000.
d. $270,000.
*55. The unexpected gain or loss on plan assets in 2014 is
a. $ 8,000 gain.
b. $16,400 loss.
c. $63,600 gain.
d. $89,400 gain.
*56. The corridor for 2014 is
a. $258,000.
b. $260,000.
c. $282,500.
d. $333,500.
*57. The amount of unrecognized net actuarial gain amortized in 2014 is
a. $6,375.
b. $6,250.
c. $4,844.
d. $4,157.
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19- 22
Test Bank for Intermediate Accounting, Tenth Canadian Edition
MULTIPLE CHOICE ANSWERS—Computational
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
31.
32.
33.
34.
35.
b
a
b
c
c
36.
37.
38.
39.
40.
d
a
b
b
d
41.
42.
43.
44.
45.
b
b
c
b
d
*46.
*47.
*48.
*49.
*50.
c
b
b
d
c
*51.
*52.
*53.
*54.
*55.
d
c
c
b
a
*56.
*57.
b
b
DERIVATIONS—Computational
No. Answer
31.
b
32.
a
33.
b
34.
c
35.
c
36.
d
37.
38.
39.
40.
41.
a
b
b
d
b
42.
43.
44.
45.
b
c
b
d
*46.
*47.
*48.
*49.
*50.
*51.
*52.
*53.
*54.
*55.
*56.
c
b
b
d
c
d
c
c
b
a
b
Derivation
$180,000 + $9,000 + $25,000 - $40,000 = $174,000
$700,000 + $56,000 + $125,000 - $96,000 = $785,000
$288,000 + $216,000 + $48,000 – $72,000 = $480,000
$50,000 + ($600,000 × 10%) – $45,000 = $65,000
$450,000 + $195,000 + $45,000 + $82,500 – $105,000 = $667,500
funding minus pension expense = accrued pension asset/liab.
$410,000 - X = $1,220,000 - $1,320,000; X = $510,000
$360,000 (given)
$1,920,000 – $1,800,000 = $120,000 liability
$3,500,000 – $2,500,000 = $1,000,000
$204,000 + [($1,800,000 + $50,000) X 9%)] + $50,000 = $420,500
$126,000 + ($900,000 x 10%) - $24,000 = $192,000
Note: the actuarial loss is not part of pension expense, but is charged to OCI
$180,000 + ($2,400,000 × 10%) – ($2,100,000 × 9%) = $231,000
$200,000 + $27,000 + ($200,000 x 10%) - $40,000 = $207,000
$90,000 + [($720,000 + $10,000) x 9%] + $10,000 - $56,000 = $109,700
$720,000 + $10,000 + $90,000 + [($720,000 + $10,000) x 9%] - $96,000 =
$789,700.
$340,000 + ($2,000,000 X 8%) + ($2,000,000 ÷ 25) = $580,000
$285,000 – $300,000 = $15,000 debit
$630,000 + $240,000 – $810,000 – $15,000 = $45,000 gain
$15,000 + $225,000 – $225,000 = $15,000
$912,000 + $210,000 – $942,000 – $15,000 = $165,000 gain
$1,400,000 + $80,000 – $75,000 + ($1,400,000 ×10%) = $1,545,000
$1,250,000 + $88,000 + $90,000 – $75,000 = $1,353,000
$2,490,000 × 11% = $273,900
($2,870,000 – $2,600,000) – ($315,000 – $235,000) = $190,000
$190,000 – ($2,600,000 × 7%) = $8,000 gain
$2,600,000 × 10%) = $260,000
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Pensions and Other Employee Future Benefits
*57.
b
19- 23
($360,000 – $260,000) ÷ 16 = $6,250
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19- 24
Test Bank for Intermediate Accounting, Tenth Canadian Edition
MULTIPLE CHOICE—CPA Adapted
58. 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 (accrued) 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.
59. The following information pertains to Rembrandt Inc.'s pension plan for calendar 2014:
Defined benefit obligation at Jan 1/14 ........................
$96,000
Interest (discount) rate ...............................................
10%
Current service costs .................................................
$24,000
Pension benefits paid retirees ....................................
$20,000
The corporation uses the immediate recognition approach under IFRS. If no change in actuarial
estimates occurred during 2014, Rembrandt's defined benefit obligation at December 31, 2014
would be
a. $85,600.
b. $100,000.
c. $105,600.
d. $109,600.
60. At January 1, 2014, Van Gogh Corp.’s defined benefit pension plan, for which they are using
the immediate recognition approach under IFRS, had a defined benefit obligation of $100,000,
while the fair value of the plan assets was $120,000. During 2014, 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, 2014?
a. $239,000
b. $205,000
c. $144,000
d. $135,000
61. Bateman Corp. provides a defined benefit pension plan for its employees, and uses the
immediate recognition approach under IFRS to account for it. The trustee administering the plan
provided the following information for the year ended December 31, 2014:
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 retirees .................................................
325,000
Actual and expected return .......................................
60,000
Interest (discount) rate ...............................................
8%
The fair value of the plan assets at December 31, 2014 would be
a. $1,235,000.
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Pensions and Other Employee Future Benefits
19- 25
b. $1,295,000.
c. $1,335,000.
d. $1,535,000.
62. At December 31, 2014, 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 the immediate recognition approach under IFRS. What is the net defined
benefit liability/asset account that should be shown on Leonardo’s December 31, 2014 statement
of financial position?
a. $1,200,000 liability
b. $1,200,000 asset
c. $6,200,000 liability
d. $5,000,000 asset
63. Thomson Corp. provides a defined benefit pension plan for its employees, and uses the
immediate recognition approach under IFRS to account for it. The corporation's actuary has
provided the following information for the year ended December 31, 2014:
Defined benefit obligation, Dec 31 ..............................
525,000
Fair value of plan assets, Dec 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 pension expense to be reported for 2014 is
a. $241,500.
b. $324,000.
c. $406,500.
d. $524,000.
64. Bateman Corp. provides a defined benefit pension plan for its employees, and uses the
immediate recognition approach under IFRS to account for it. The trustee administering the plan
provided the following information for the year ended December 31, 2014:
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 retirees .................................................
325,000
Actual and expected return .......................................
60,000
Interest (discount) rate ...............................................
8%
The pension expense to be reported for 2014 is
a. $270,000.
b. $366,000.
c. $374,000.
d. $434,000.
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19- 26
Test Bank for Intermediate Accounting, Tenth Canadian Edition
65. Magritte Inc. provides a defined benefit pension plan for its employees (for which the
corporation uses the immediate recognition approach). At December 31, 2014, the fair value of
the plan assets is less than the defined benefit obligation. In its statement of financial position at
December 31, 2014, 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.
Use the following information for questions *66–*67.
Lautrec Corp. provides a defined benefit pension plan for its employees, and uses the deferral
and amortization approach to account for it. The trustee administering the plan provided the
following information for the year ended December 31, 2014:
Fair value of plan assets, Dec 31 ............................... $1,200,000
Accrued benefit obligation, Dec 31 ............................. 1,335,000
Pension expense for year ...........................................
300,000
Employer's contribution for year .................................
360,000
Unrecognized past service costs ................................
30,000
On December 31, 2013, the accrued benefit liability/asset account had a debit balance of
$45,000.
*66. At December 31, 2014, what is the amount of accrued benefit liability/asset?
a. $ 15,000
b. $ 60,000
c. $ 90,000
d. $105,000
*67. In the December 31, 2014 financial statements, how much would be reported as the plan’s
funded status (liability)?
a. $ 60,000
b. $105,000
c. $135,000
d. $165,000
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Pensions and Other Employee Future Benefits
19- 27
MULTIPLE CHOICE ANSWERS—CPA Adapted
Item
58.
59.
Ans.
b
d
Item
60.
61.
Ans.
c
b
Item
62.
63.
Ans.
a
a
Item
64.
65.
Ans.
Item
Ans.
c
a
*66.
*67.
d
c
DERIVATIONS—CPA Adapted
No. Answer
58.
b
59.
d
60.
c
61.
b
62.
a
63.
a
64.
c
65.
a
*66.
d
*67.
c
Derivation
Conceptual
$96,000 + $24,000 + ($96,000 × 10%) – $20,000 = $109,600
$120,000 + $9,000 + $110,000 - $95,000 = $144,000
$1,200,000 + $60,000 + $360,000 - $325,000 = $1,295,000
$6,200,000 – $5,000,000 = $1,200,000 liability
$240,000 + $24,000 – $82,500 + $60,000 = $241,500
$300,000 + 30,000 + [($1,270,000 + $30,000) x 8%] – $60,000 = $374,000
Conceptual
$360,000 – $300,000 + $45,000 = $105,000
$1,335,000 – $1,200,000 = $135,000
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19- 28
Test Bank for Intermediate Accounting, Tenth Canadian Edition
EXERCISES
Ex. 19-68 Pension accounting terminology
Briefly explain the following terms:
a. Service cost
b. Interest cost
c. Past service costs
d. Vested benefits
Solution 19-68
a. The (current) service cost component of pension expense is the cost of the benefits to be
provided in future in exchange for services provided in the current period.
b. The interest cost component of pension expense is the interest for the period on 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.
c. 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 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.
d. Vested benefits are those the employee is entitled to receive even if s/he provides no
additional services under the plan, e.g. if his/her employment is terminated.
Ex. 19-69 Pension asset terminology
Discuss the following ideas related to pension assets:
a. Actual return on plan assets.
b. Expected return on plan assets.
c. Unexpected gains and losses on plan assets.
Solution 19-69
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. 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.
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Pensions and Other Employee Future Benefits
19- 29
Ex. 19-70 Pension plan calculations
The following information relates to the defined benefit pension plan for Strawberry Dale Ltd.:
Dec 31/13
Dec 31/14
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 2014, the corporation contributed $390,000 to the plan, and the trustee paid $210,000 in
benefits to retirees. Strawberry Dale uses the immediate recognition approach under IFRS.
Instructions
For the year ended December 31, 2014:
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 19-70
a. $2,250,000 × 8% = $180,000
b.
Fair value of plan assets Dec 31/14 ........................... $2,640,000
Fair value of plan assets Dec 31/13 ........................... (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
Ex. 19-71 Pension plan calculations and journal entries
On January 1, 2014, 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 2014 are:
Current service cost ...................................................
140,000
Contributions to the plan ............................................
204,000
Benefits paid ..............................................................
200,000
Actual return on plan assets .......................................
192,000
Interest (discount) rate ..............................................
9%
Prune uses the immediate recognition approach under ASPE.
Instructions
a. Calculate the defined benefit obligation at December 31, 2014.
b. Calculate the fair value of plan assets at December 31, 2014.
c. Calculate pension expense for 2014.
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19- 30
d.
Test Bank for Intermediate Accounting, Tenth Canadian Edition
Prepare the journal entries to record the pension expense and the contributions for 2014.
Solution 19-71
a. Defined benefit obligation, Jan 1 ................................ $3,200,000
Current service cost ...................................................
140,000
Interest cost (9% × $3,200,000) .................................
288,000
Benefits paid .............................................................. (200,000)
Defined benefit obligation, Dec 31 .............................. $3,428,000
b. Fair value of plan assets, Jan 1 ..................................... $3,200,000
Actual return...............................................................
192,000
Contributions ..............................................................
204,000
Benefits paid .............................................................. (200,000)
Fair value of plan assets, Dec 31 ............................... $3,396,000
c.
Current service cost ...................................................
Interest cost (9% × $3,200,000) .................................
Actual return on plan assets .......................................
Pension expense........................................................
$140,000
288,000
(192,000)
$236,000
d.
Pension Expense ..........................................................................
Net Defined Benefit Liability/Asset ..........................................
236,000
Net Defined Liability/Asset ............................................................
Cash.......................................................................................
204,000
236,000
204,000
Ex. 19-72 Approaches to accounting for pension expense
Discuss the difference between the immediate recognition approach and the deferral and
amortization approach when accounting for annual pension expense.
Solution 19-72
Under the immediate recognition approach, pension expense includes current service costs, past
service costs, and interest cost on the opening DBO, less expected return on assets (less the
actual return, if different). This may cause the annual pension expense to fluctuate significantly.
However, an advantage of this approach is that the actual funded status is disclosed on the
statement of financial position via the net defined benefit liability/asset account. Note that under
IFRS, any actuarial gains or losses or remeasurement gains/losses on plan assets are not part of
pension expense (i.e. net income), but flow through OCI.
Under the deferral and amortization approach, the recognition of past service costs and actuarial
gains/losses can be deferred and amortized over current and future periods. This tends to smooth
out the pension expense, but misstates the funded status on the statement of financial position,
as the unrecognized past service costs and actuarial gains/losses are “off balance sheet.”
However, all such amounts must be fully disclosed in the notes.
IFRS now requires the use of the immediate recognition approach only. ASPE currently permits
either approach; however the new Section 3462 of the Handbook will eliminate the use of the
deferral and amortization approach.
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Pensions and Other Employee Future Benefits
19- 31
Ex. 19-73 Measuring and recording pension expense
Pumpkin Ltd. received the following information from its pension plan trustee concerning their
defined benefit pension plan for the year ended December 31, 2014:
January 1, 2014
December 31, 2014
Defined benefit obligation
$3,500,000
$3,990,000
Fair value of plan assets
1,750,000
2,240,000
For 2014, the service cost is $210,000 and past service cost (effective Jan 1) is $100,000. During
2014, Pumpkin contributed $595,000 to the plan. The actual and expected return on plan assets
is 8%. Pumpkin uses the immediate recognition approach under IFRS.
Instructions
a. Calculate the pension expense to be reported in 2014.
b. Prepare the journal entries to record the pension expense and the employer’s contribution for
2014.
Solution 19-73
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
$458,000
b.
Pension Expense ..........................................................................
Net Defined Benefit Liability/Asset ..........................................
458,000
Net Defined Benefit Liability/Asset ................................................
Cash.......................................................................................
595,000
458,000
595,000
Ex. 19-74 Measuring and recording pension expense
The following information relates to the defined benefit pension plan for Huckleberry Ltd. for 2014.
The corporation uses the immediate recognition approach under IFRS.
Current service cost ................................................... $260,000
Contributions ..............................................................
250,000
Interest rate for obligation ...........................................
10%
Expected & 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 pension expense to be reported for 2014.
b. Prepare the journal entries to record pension expense and the employer's contributions for
2014.
Solution 19-74
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)
Pension expense—2014 ............................................ $267,800
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19- 32
Test Bank for Intermediate Accounting, Tenth Canadian Edition
Note the actuarial gain is not part of pension expense, but would be booked through OCI.
b.
Pension Expense ..........................................................................
Net Defined Benefit Liability/Asset ..........................................
267,800
Net Defined Benefit Liability/Asset ................................................
Cash.......................................................................................
250,000
267,800
250,000
*Ex. 19-75 Corridor amortization
Explain corridor amortization.
Solution 19-75
The corridor approach for amortizing pension plan gains and losses is used when they get too
large. The unrecognized net gain or loss gets too large when it exceeds the arbitrarily selected
criterion of 10% of the larger of the beginning balances of the accrued benefit obligation or the fair
value of the plan assets. Any systematic method of amortizing the excess unrecognized gain or
loss may be used but it cannot be less than the amount calculated using the straight-line method
over the average remaining service life of all active employees. Note this is only used with the
deferral and amortization approach, which is now only acceptable for ASPE. IFRS requires the
use of the immediate recognition approach, which does not use the corridor approach.
*Ex. 19-76 Pension plan calculations and journal entries
Information about the defined benefit pension plan of Olive Corp. is as follows:
Dec 31/13
Dec 31/14
Accrued benefit obligation ............................. $6,400,000
$6,690,000
Unrecognized past service cost .....................
245,000
185,000
Fair value of plan assets ............................... 6,530,000
6,640,000
Pension expense........................................... 1,330,000
1,870,000
Contribution for year ...................................... 1,310,000
1,800,000
Interest rate for ABO .....................................
9%
8%
The accrued pension liability was $15,000 at January 1, 2013 and $35,000 at January 1, 2014.
Olive uses the deferral and amortization approach.
Instructions
a. Calculate the corridor for 2014.
b. Calculate the accrued pension liability at December 31, 2014.
c. Prepare the entries for 2014 to record the pension expense and employer’s contribution.
Solution 19-76
a. 10% × $6,400,000 = $640,000; 10% × $6,530,000 = $653,000
The corridor is the larger, $653,000.
b.
Accrued pension liability, Jan 1, 2013 ........................
Addition for 2013 ($1,330,000 – $1,310,000) .............
Addition for 2014 ($1,870,000 – $1,800,000) .............
Accrued pension liability, Dec 31, 2014 ......................
$ 15,000
20,000
70,000
$105,000
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Pensions and Other Employee Future Benefits
c.
19- 33
Pension Expense .......................................................................... 1,870,000
Accrued Benefit Liability/Asset ...............................................
1,870,000
Accrued Benefit Liability/Asset ...................................................... 1,800,000
Cash.......................................................................................
1,800,000
*Ex. 19-77 Corridor approach for amortization of actuarial gains and losses
Pineapple Corp. has 200 employees who are expected to receive benefits under the company's
defined benefit pension plan, which is accounted for using the deferral and amortization
approach. The total number of service-years of these employees is 2,000. The actuary for the
pension plan calculated the following net gains and losses:
For the Year Ended
December 31
(Gain) Or Loss
2013
$330,000
2014
(297,000)
2015
495,000
Prior to 2013 there were no unrecognized actuarial gains or losses. Information about the
company's accrued benefit obligation and plan asset values follows:
As of January 1
2013
2014
2015
Accrued benefit obligation
$1,050,000
$1,170,000
$1,470,000
Fair value of plan assets
840,000
1,230,000
1,275,000
Instructions
Based on the above information, prepare a schedule which reflects the amount of unrecognized
net actuarial gain or loss to be amortized as a component of pension expense for the years 2013,
2014, and 2015. Pineapple amortizes such unrecognized net gains or losses using the
straight-line method over the expected average remaining service life (EARSL) of participating
employees.
Solution 19-77
Corridor Test and Gain/Loss Amortization Schedule
Beginning of Year
ABO
Plan Assets
Corridor
2013
$1,050,000
$ 840,000
$105,000
2014
1,170,000
1,230,000
123,000
2015
1,470,000
1,275,000
147,000
Cumulative
(Gain) Or Loss
$ -0330,000
12,300**
Amortization
$ -020,700*
-0-
Average Service Years = 2,000 ÷ 200 = 10 years
*$330,000 – $123,000 = $207,000 ÷ 10 = $20,700
**$330,000 – $297,000 – $20,700 = $12,300
*Ex. 19-78 Pension reconciliation schedule
Boysenberry Inc. provides the following information about its defined benefit pension plan for the
year ended December 31, 2014:
Service cost for 2014 ................................................. $ 30,000
Unrecognized past service costs ................................
360,000
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19- 34
Test Bank for Intermediate Accounting, Tenth Canadian Edition
Fair value of plan assets ............................................
870,000
Accrued benefit obligation .......................................... 1,040,000
Unrecognized actuarial gain .......................................
95,000
Interest on accrued benefit obligation .........................
75,000
The corporation uses the deferral and amortization approach.
Instructions
Prepare a schedule to reconcile the funded status of the pension plan with the amounts that would
be reported on Boysenberry Inc.'s statement of financial position at December 31, 2014.
Solution 19-78
BOYSENBERRY INC.
Pension Reconciliation Schedule
Year Ended December 31, 2014
Accrued benefit obligation ............................................................. $(1,040,000)
Fair value of plan assets ...............................................................
870,000
Accrued benefit obligation in excess of plan assets ....................... (170,000)
Unrecognized past service cost.....................................................
360,000
Unrecognized actuarial gain .......................................................... (95,000)
Accrued pension liability ................................................................ $ 95,000
*Ex. 19-79 Calculating and recording pension expense
The following information is related to the Papaya Corp. defined benefit pension plan for 2014:
Accrued benefit obligation, Jan 1 ............................... $480,000
Service cost ...............................................................
126,000
Interest rate on ABO ..................................................
10%
Amortization of past service cost ................................
24,600
Actual return on plan assets .......................................
16,800
Expected return on plan assets ..................................
21,800
Contributions ..............................................................
168,000
The corporation uses the deferral and amortization approach.
Instructions
a. Calculate the pension expense for 2014.
b. Prepare the journal entries to record pension expense and the employer’s contributions for
2014.
Solution 19-79
a. Service cost ...............................................................
Interest cost (10% × $480,000) ..................................
Amortization of past service cost ................................
Expected return on plan assets ..................................
Pension expense........................................................
b.
$126,000
48,000
24,600
(21,800)
$176,800
Pension Expense ..........................................................................
Accrued Benefit Liability/Asset ...............................................
176,800
176,800
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Pensions and Other Employee Future Benefits
Accrued Benefit Liability/Asset ......................................................
Cash.......................................................................................
19- 35
168,000
168,000
*Ex. 19-80 Calculating accrued pension liability/asset
Satsuma Corp. provided the following balances regarding their defined benefit pension plan at
December 31, 2014:
Accrued benefit obligation .......................................... $4,500,000
Fair value of plan assets ............................................ 4,340,000
Unrecognized past service costs ................................
120,000
The corporation uses the deferral and amortization approach.
Instructions
a. Calculate the accrued pension liability or asset.
b. Assume the same facts as in a. but that Satsuma had an actuarial gain of $20,000 in 2014.
Recalculate the accrued pension asset or liability.
Solution 19-80
a. Accrued benefit obligation .......................................... $4,500,000
Fair value of plan assets ............................................ 4,340,000
ABO in excess of plan assets .....................................
160,000
Less unrecognized past service cost ..........................
(120,000)
Accrued pension liability ............................................. $ 40,000
b.
Accrued benefit obligation .......................................... $4,500,000
Fair value of plan assets ............................................ 4,340,000
ABO in excess of plan assets .....................................
160,000
Less unrecognized past service cost ..........................
(120,000)
Plus actuarial gain ......................................................
20,000
Accrued pension liability ............................................. $ 60,000
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19- 36
Test Bank for Intermediate Accounting, Tenth Canadian Edition
PROBLEMS
Pr. 19-81 Measuring and recording pension expense
Presented below is information related to the defined benefit pension plan of Swiss Chard Ltd. for
the year 2014. The corporation uses the immediate recognition approach under IFRS.
Defined benefit obligation, Jan 1 ................................ $375,000
Fair value of plan assets, Jan 1 ..................................
350,000
Current service cost ...................................................
300,000
Interest (discount) rate ...............................................
10%
Expected & actual return on plan assets ....................
9%
Past service cost (as of Jan 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 pension expense to be reported on the income statement for 2014.
b. Calculate the amount to be shown as OCI for 2014.
c. Calculate the fair value of the plan assets at December 31, 2014.
d. Prepare the journal entries to reflect the accounting for the company's pension plan for the
year ending December 31, 2014.
Solution 19-81
a. Current service cost ............................................................. $300,000
Interest on DBO [(10% × ($375,000 + $25,000)] ..................
40,000
Expected & actual return on plan assets (9% × $350,000) ... (31,500)
Past service cost ..................................................................
25,000
Pension expense.................................................................. $333,500
b.
Actuarial loss........................................................................
Remeasurement loss on plan assets....................................
Amount to be shown as OCI (Dr) .........................................
$14,900
11,500
$26,400
c.
Fair value of plan assets, Jan 1 ............................................ $350,000
Expected & 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, Dec 31 ......................................... $410,000
d.
Pension Expense ..........................................................................
Net Defined Benefit Liability/Asset ..........................................
333,500
Remeasurement Loss (OCI) .........................................................
Net Defined Benefit Liability/Asset ..........................................
26,400
Net Defined Benefit Liability/Asset ................................................
290,000
333,500
26,400
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19- 37
Pensions and Other Employee Future Benefits
Cash.......................................................................................
290,000
Pr. 19-82 Calculating pension expense and pension plan funded status
Fernando’s Furniture Inc. sponsors a defined benefit pension plan for its employees. The plan’s
trustee reports the following information for calendar 2014:
Defined benefit obligation, Jan 1 ................................ $240,000
Fair value of plan assets, Jan 1 ..................................
180,000
Current service cost ...................................................
80,000
Actual & 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 Jan 1)..................................
10,000
The corporation uses the immediate recognition approach under ASPE.
Instructions
a. Calculate the amount of pension expense for 2014, and prepare the required adjusting
journal entries.
b. Calculate the funded status of the plan on December 31, 2014.
Solution 19-82
a. Pension expense for 2014
Current service cost ..........................................................
Interest on ABO [(10% x ($240,000 + $10,000)] ................
Actual & expected return on plan assets ...........................
Past service cost ...............................................................
Pension expense ..............................................................
$ 80,000
25,000
(21,000)
10,000
$ 94,000
Pension Expense....................................... ...........................................
Net Defined Benefit Liability/Asset……....................................
94,000
Net Defined Benefit Liability/Asset.................................... .............
Cash ......................................................................... ..............
70,000
94,000
70,000
b. Funded Status at December 31, 2014:
Defined Benefit Obligation (1) .................................... $ (235,000)
Plan assets (2) ...........................................................
151,000
Underfunded .............................................................. $ (84,000)
(1) Defined Benefit Obligation
Beginning balance......................................................
Service costs..............................................................
Interest costs..............................................................
Past service cost ........................................................
Payments to retirees ..................................................
$240,000
80,000
25,000
10,000
(120,000)
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19- 38
Test Bank for Intermediate Accounting, Tenth Canadian Edition
Ending balance ..........................................................
$235,000
(2) Plan assets
Beginning balance......................................................
Actual return...............................................................
Contributions ..............................................................
Payments to retirees ..................................................
Ending balance ..........................................................
$180,000
21,000
70,000
(120,000)
$151,000
Pr. 19-83 Preparation of a pension worksheet and pension entries
The accountant for Camberwell Ltd. has developed the following information regarding the
company's defined benefit pension plan for calendar 2014:
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%
The corporation uses the immediate recognition approach under ASPE.
Instructions
a. Using the above information, complete the pension work sheet below for 2014. 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, 2014.
CAMBERWELL LTD.
Pension Work Sheet
for the year ended December 31, 2014
General Journal Entries
Memo Entries
——————————————————————————————————————————
Annual
Net Defined
Defined
Pension
Benefit
Benefit
Plan
Expense
Cash
Asset/Liab
Obligation
Assets
——————————————————————————————————————————
Bal., Dec. 31, 2013
(1,200,000)
(4,500,000)
3,300,000
Service cost
Interest cost
Actual return
Contributions
Benefits paid
Journal entry for 2014
______
______
______
______
______
Bal., Dec. 31, 2014
______
______
______
______
______
Solution 19-83
a.
CAMBERWELL LTD.
Pension Work Sheet
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Pensions and Other Employee Future Benefits
19- 39
for the year ended December 31, 2014
(immediate recognition approach)
General Journal Entries
Memo Entries
——————————————————————————————————————————
Annual
Net Defined
Defined
Pension
Benefit
Benefit
Plan
Expense
Cash
Asset/Liab
Obligation
Assets
——————————————————————————————————————————
Bal., Dec. 31, 2013
(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., Dec. 31, 2014
(855,000)
(5,478,000
4,623,000
(1) $4,500,000 × 10% = $450,000
b.
Pension Expense ..........................................................................
Net Defined Benefit Liability/Asset ..........................................
735,000
735,000
Net Defined Benefit Liability/Asset ................................................ 1,080,000
Cash.......................................................................................
1,080,000
*Pr. 19-84 Amortization of past service costs using EARSL (Expected Average Remaining
Service Life)
On January 1, 2014, Fudge Inc. amended its defined benefit pension plan, which caused an
increase of $3,600,000 in its accrued benefit obligation. The company has 400 employees who
are expected to receive benefits under the plan. The personnel department provided the following
information regarding expected employee retirements:
Expected Retirements
Number of Employees
on Dec 31 each year
40
2014
120
2015
60
2016
160
2017
20
2018
400
Fudge plans to use the expected average remaining service life (EARSL) to calculate the
amortization of unrecognized past service costs. The corporation uses the deferral and
amortization approach.
Instructions
Prepare a schedule showing the annual amortization of past service costs that Fudge will
recognize as a component of pension expense from 2014 through 2018.
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19- 40
Test Bank for Intermediate Accounting, Tenth Canadian Edition
Solution 19-84
Calculation of Service Years
Year
2014
2015
2016
2017
2018
40
120
120
60
60
60
160
160
160
160
40
240
180
640
20
20
20
20
20
100
Total
400
360
240
180
20
1,200
Cost per Service Year: $3,600,000 ÷ 1,200 = $3,000.
Fudge Inc.
Calculation of Annual Past Service Costs Amortization
Total
Cost Per
Annual
Year
Service-Years
Service-Year
Amortization
2014
400
$3,000
$1,200,000
2015
360
3,000
1,080,000
2016
240
3,000
720,000
2017
180
3,000
540,000
2018
20
3,000
60,000
1,200
$3,600,000
*Pr. 19-85 Preparation of a pension worksheet and pension entries
The accountant for Camberwell Ltd. has developed the following information regarding the
company's defined benefit pension plan for 2014:
Service cost ............................................................... $ 600,000
Actual return on plan assets .......................................
315,000
Contributions .............................................................. 1,080,000
Amortization of unrecognized past service costs ........
126,000
Benefits paid to retirees..............................................
72,000
Interest rate on ABO ..................................................
10%
Expected rate of return on plan assets .......................
8%
Instructions
a. Using the above information, complete the pension work sheet below for 2014. Indicate credit
entries by parentheses, e.g. (72,000). Camberwell uses the deferral and amortization
approach.
b. Prepare the journal entries to reflect the accounting for the company's pension plan for the
year ending December 31, 2014.
Camberwell Ltd.
Pension Work Sheet
for the year ended December 31, 2014
(deferral and amortization approach)
——————————————————————————————————————————
General Journal Entries
Memo Entries
——————————————————————————————————————————
Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Pensions and Other Employee Future Benefits
19- 41
Unrecog Unrecog
Annual
Accrued
Accrued
Past
Net
Pension
Pension
Benefit
Plan
Service
(Gain)
Expense
Cash
Asset/Liab Obligation
Assets
Cost
or Loss
——————————————————————————————————————————
Bal., Dec. 31, 2011
(450,000) (4,500,000)
3,300,000
750,000
Service cost
Interest cost
Expected return
Amortization of PSC
Contributions
Benefits paid
Unrecognized gain/loss
Journal entry for 2014
______
______
______
______
______
______
______
Bal., Dec. 31, 2014
______
______
______
______
______
______
______
Solution 19-85
Camberwell Ltd.
Pension Work Sheet
for the year ended December 31, 2014
(deferral and amortization approach)
——————————————————————————————————————————
General Journal Entries
Memo Entries
——————————————————————————————————————————
Unrecog
Unrecog
Annual
Accrued
Accrued
Past
Net
Pension
Pension
Benefit
Plan
Service
(Gain)
Expense
Cash
Asset/Liab Obligation
Assets
Cost
or Loss
——————————————————————————————————————————
Bal., Dec. 31, 2011
(450,000) (4,500,000)
3,300,000
750,000
Service cost
600,000
(600,000)
Interest cost (1)
450,000
(450,000)
Expected return
(264,000)
264,000
Amortization of PSC
126,000
(126,000)
Contributions
(1,080,000)
1,080,000
Benefits paid
72,000
(72,000)
Unrecog gain/loss (2)
51,000
(51,000)
Journal entry for 2014 912,000 (1,080,000)
168,000
______
______
______
______
Bal., Dec. 31, 2014
(282,000) (5,478,000)
4,623,000
624.000
(51,000)
(1) $4,500,000 × 10% = $450,000
(2) $315,000 – ($3,300,000 × 8%) = $51,000
b.
Pension Expense ..........................................................................
Accrued Pension Asset/Liability..............................................
912,000
912,000
Accrued Pension Asset/Liability .................................................... 1,080,000
Cash.......................................................................................
1,080,000
Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
19- 42
Test Bank for Intermediate Accounting, Tenth Canadian Edition
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