Jerald Jay C.

Catacutan Intermediate Accounting

BSA-2B

Learning Resource 12: Accounting for Employee Benefits

Lesson 1: POSTEMPLOYMENT BENEFITS

A. Theoretical Exercises (Individual Task)

Choose the correct answer by writing the corresponding letter-answer and a convincing
justification that it is indeed the correct answer via applicable appropriate accounting
principles discussed in Activity 1.

1. Which statement characterizes defined contribution plan?

a. Defined contribution plans are more complex than defined benefit plans.
b. The employer’s obligation is satisfied by making the appropriate amount of periodic
contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amount by employer and employees.
Answer: B
Defined contribution (DC) plan is a type of retirement plan in which the employer, employee
or both make contributions on a regular basis. Individual accounts are set up for participants
and benefits are based on the amounts credited to these accounts (through employee
contributions and, if applicable, employer contributions) plus any investment earnings on the
money in the account.

2. Which is not characteristic of defined contribution plan?

a. The employer contribution each period is based on a formula.
b. The benefits to received are usually determined by an employee’s highest salary.
c. The accounting for a defined contribution plan is straightforward and uncomplicated.
d. The benefit of gain or risk of loss from the assets contributed to the plan is borne by
the employee.
Answer: B
The benefits to received are usually determined by an employee’s highest salary is
usually related to defined benefit plan.

3. A formula in a defined contribution plan

a. Defines the benefits that the employee will receive at the time of retirement.
b. Ensures that the defined benefit cost and funding are the same.
c. Requires an employer to contribute a certain sum each period based on the formula.
d. Ensures that enough fund would be available.
Answer: C
Under this type of plan, the employee contributes a predetermined portion of his or her
earnings (usually pretax) to an individual account, all or part of which is matched by the
employer. Defined contribution plan as a "plan which provides for an individual account for
each participant and for benefits based solely on the amount contributed to the participant's
 account, and any income, expenses, gains and losses, and any forfeitures of accounts of
other participants which may be allocated to such participant's account".

4. Which statement is true concerning the recognition and measurement of a defined

contribution plan?
a. Contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contribution at the end of the period shall be recognized as accrued
liability.
c. Any excess contribution shall be recognized as prepaid expense but only to the
extent that the prepayment will lead to a reduction in future payments or a cash refund.
d. All of these statements are true about a defined contribution plan.
Answer: D
Recognition and measurement of a defined contribution plan:
a. The contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contribution at the end of the period shall be recognized as accrued
expense.
c. Any excess contribution shall be recognized as prepaid expense but only to the
extent that the prepayment will lead to a reduction in future payments or a cash
refund.

5. Which statement characterizes defines benefit plan?

a. Defined benefit plans are comparatively simple.
b. Retirement benefits are based on the plan’s benefit formula.
c. Retirement benefits depend on how well pension fund assets have been managed.
d. The investment risk is borne by the employee.
Answer: B
A defined benefit plan is simply defined as a postemployment plan other than a
defined contribution plan. Under a defined benefit plan, an entity’s obligation is to
provide the agreed benefits to employees. In other words, an employee is guaranteed
specific or definite amount of benefit which is usually related to his salary and years of
service.

6. Which statement is incorrect concerning the recognition and measurement of a

defined benefit plan?
a. Actuarial assumptions are required to measure the obligation and expense and there
is possibility of actuarial gains and losses.
b. The obligation is measured on a discounted basis.
c. The defined benefit plan must be fully funded.
d. The expense recognized for a defined benefit plan is not necessarily the amount of
contribution due for the period.
Answer: C
An entity is required to recognize the net defined benefit liability or asset in its
statement of financial position. [IAS 19(2011).63]. However, the measurement of a net
defined benefit asset is the lower of any surplus in the fund and the asset ceiling (i.e
the present value of any economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan). [IAS 19(2011).64].
7. In a benefit plan, the process of funding refers to
a. Determining the defined benefit obligation.
b. Determining the accumulated benefit obligation.
c. Making the periodic contributions to a funding agency to ensure that funds are
available to meet claims.
d. Determining the amount reported for pension expense.
Answer: C

8. In accounting for a defined benefit plan

a. An appropriate funding must be established to ensure that enough fund would be
available at retirement.
b. The employer responsibility is simply to make a contribution each year.
c. The expense recognized each period is equal to the cash contribution to the plan.
d. The liability is determined based upon variables that reflect current salary levels.
Answer: A
The entity in this case must make contributions such that the contributions plus
earning would be sufficiently large to cover future retirement benefits. Thus the entity
assumes the investment risk in a defined benefit plan.

9. The formula in a defined benefit plan

a. Requires that the benefit of gain or risk of loss from the assets contributed to the plan
should be borne by the employee.
b. Defines the benefits that the employee will receive at the time of retirement.
c. Requires that the defined benefit cost and funding must the same.
d. Defines the contribution to be made by the employer and no promise is made
concerning the ultimate benefits to be paid out to the employees.
Answer: B

10. In rare circumstances, when a retirement benefit plan has attributes of both defined
contribution and defined benefit plan, the plan is deemed
a. Defined benefit plan
b. Defined contribution plan
c. Neither defined nor defined contribution plan
d. Both defined benefit and defined contribution plan
Answer: A
11. The component of defined benefit cost include all, except
a. Service cost c. Remeasurements
b. Net interest d. Contribution to the plan
Answer: D
PAS 19, paragraph 120, provides that an entity shall recognize the following
components of defined benefit cost:
1. service cost
2. net interest
3. remeasurements

12. The service cost of a defined benefit plan comprises all, except
a. Current service cost c. Gain or loss on plan settlement
b. Past service cost d. Net interest

Answer: D
PAS 19, paragraph 120, provides that an entity shall recognize the following
components of defined benefit cost:
1. Service cost which comprises:
a. current service cost
b. past service cost
c. any gain or loss on settlement

13. Which of the following components of defined benefit cost shall be recognized
through other comprehensive income?
a. Current service cost c. Net interest
b. Past service cost d. Remeasurements
Answer: D
All of the remeasurements are fully recognized through other comprehensive income
and are not recycled or reclassified subsequently to profit or loss. However,
paragraph 122 provides that remeasurement may be transferred within equity or
reclassified to retained earnings.

14. Remeasurements of defined benefit plan include

a. The difference between actual return and interest income on plan assets.
b. Actuarial gain or loss on projected benefit obligation.
c. Change in the effect of asset ceiling minus interest expense on the beginning effect of
asset ceiling.
d. All of these are included in remeasurements of defined benefit plan.
Answer: D

15. When the entity amends a pension plan, past service cost should be
a. Treated as a prior period adjustment because no future periods are benefited.
b. Amortized over the remaining service period of employees.
c. Recorded in other comprehensive income.
d. Reported as an expense in the period the plan is amended.
Answer: D
PAS 19, paragraph 103, provides that an entity shall recognize past service cost as
an expense at the earlier of the following dates:
a. when the plan amendment or curtailment occurs.
b. when the entity recognizes related restructuring costs or termination benefits.

16. What is the meaning of net interest in relation to a defined benefit cost?
a. Interest expense on defined benefit liability
b. Interest income on the fair value of plan assets
c. The difference between interest expense on defined benefit liability, interest expense
on effect of asset ceiling and interest income on plan assets.
d. Interest expense on defined benefit liability less applicable income tax
Answer: C
Net interest on defined benefit liability or asset is the change in the defined benefit
obligation, plan assets and effect of asset ceiling as a result of the passage of time.
The net interest can be viewed as comprising three elements namely:
a. interest expense on defined benefit liability
b. interest income
c. interest expense on effect of asset ceiling
In other words, the net interest expense is the difference between interest expense on
defined benefit liability, interest expense on effect of asset ceiling and interest income
on plan assets.

17. Which of the following should be included in plan assets?

a. Assets held by a long-term employee benefit fund
b. Qualifying insurance policy
c. Both assets held by a long-term employee benefit fund and qualifying insurance
policy
d. Neither assets held by a long-term employee benefit fund nor qualifying insurance
policy
Answer: C
Plan asset comprise assets held by a long term benefit fund and a qualifying
insurance policies.

18. The return on plan assets

a. Is equal to the change in the fair value of the plan assets during the year.
b. Includes interest, dividends and change in the fair value of the plan assets during the
year.
c. Is equal to the discount rate times the fair value of the plan assets at the beginning of
the period.
d. Is equal to the expected rate of return times the fair value of plan assets at the
beginning of the period.
Answer: B
The components of return on plan assets include the following:
a. interest, dividend and other income derived from the plan assets.
b. realized and unrealized gains and losses on the plan assets.

19. Plan assets are assets held by a long-term benefit fund and must satisfy all of the
following conditions, except
a. The asset are held by an entity, the fund itself, that is, legally separate from the
reporting entity.
b. The assets in the fund are available to pay only employee benefits.
c. The assets in the fund are not available to the reporting entity’s own creditors.
d. The assets in the fund can be returned to the entity even if the remaining assets are
insufficient to meet all employee benefit obligations.
Answer: D
Plan assets comprise assets held by a long term benefit fund and qualifying insurance
policies. The conditions for assets held by a long term benefit fund are:
e. the assets are held by an entity, the fund itself, that is legally separate from the
reporting entity.
f. the assets are available to pay only employee benefits.
g. the assets are not available to the reporting entity’s own creditors even in
bankruptcy.
h. the assets cannot be returned to the reporting entity or can be returned to the
reporting entity if the remaining assets of the fund are sufficient to meet all employee
benefit obligations or the assets are returned to the reporting entity to reimburse it for
employee benefits already paid.

20. It is an insurance policy issued by an insurer that is not a related party of the
reporting entity and the proceeds of the policy can be used only to pay employee
benefits under a defined benefit plan.
a. Qualifying insurance policy c. Annuity
b. Aggregate policy d. Unconditional insurance policy
Answer: A
A qualifying insurance policy is an insurance policy issued by an insurer that is not a
related party of the reporting entity. The proceeds of the policy can be used only to
pay employee benefits and are not available to the reporting entity’s own creditor’s
even in bankruptcy.
 II. Individual Task

Solve the following problems with solutions presented in good form; and choose the
correct answer (re: letter-answer) from the given probable answers.

1. AGA Company

1.A
Solution:
Future salary (500,000 x 2.190) P 1,095,000

Annual pension payment ( 1,095,000 x 3% x 15 yrs.) P 492,000

2.B
Solution:
Annual pension payment P 492,750
Multiply by PV of an ordinary annuity of 1 at 12% f0r 10 periods. 5.650
Present value- 12/31/2040 2,784,037.50
Multiply by PV of 1 at 12% for 20 periods 0.104
Projected benefit obligation- 12/31/20202 P 289,540

2. AHA Generous Company

1. A
Solution:
Annual pension payment (800,000 x 2% x 20 yrs.) P 320,000
Multiply by PV of an ordinary annuity of 1 at 8% for 21 periods 10.02
Present value- 12/31/2045 3,026,400
Multiply by PV of 1 at 8% for 25 periods 0.15
Projected benefit obligation after amendment P 480,960

2.B
Solution:
Annual pension payment (800,000 x 3% x 20 yrs.) P 480,000
Multiply by PV of an ordinary annuity of 1 at 8% for 21 periods 10.02
Present value- 12/31/2045 4,809,600
Multiply by PV of 1 at 8% for 25 periods 0.15
Projected benefit obligation before amendment P 721,440
3.C
Solution:
Projected benefit obligation after amendment P 721,440
Projected benefit obligation before amendment (480,960)
Past service cost- 2020 P 240,480