PROGRAM: Bachelor of Science in Accountancy

LEVEL: 2
COURSE TITLE: INTERMEDIATE ACCOUNTING II
COURSE CODE: ATAE16
NO. OF UNITS: 6
PRE-REQUISITE: Intermediate Accounting I
MODULE TITLE: EMPLOYEE BENEFITS (PART 2)continuation
REFERENCE: Intermediate Accounting 2 by: Zeus Vernon B. Millan

Illustration: Return and interest income on plan assets

Information on ABC Co.’s defined benefit plan on Jan 1, 20x1 is as follows:
 Fair value of plan assets, Jan 1 120,000
 Present value of the defined benefit obligation 180,000
 Discount rate based on high quality corporate bonds 5%
Information on changes during the year:
 Contributions to the fund, July 1, 20x1 200,000
 Benefits paid to retirees, Sept. 30, 20x1 50,000
 Fair value of plan assets, Dec 31 282,000
 Present value of defined benefit obligation, Dec 31 360,000
Requirements: Compute the following:
a. Interest income on plan assets
b. Return on plan assets
c. Remeasurements to the net defined benefit liability (asset)

Solutions:
a. Interest income on plan assets
Interest income on the beginning balance of FVPA (120,000 x 5% x 12/12) 6,000
Interest income on the contributions made on July 1, 20x1 (200,000 x 5% x 6/12) 5,000
Reduction in interest income due to the benefits paid out of the plan assets
On Sept. 30, 20x1 (50,000 x 5% x 3/12) ( 625)
Interest income on plan assets 10,375

b. Return on plan assets

Fair value of plan assets
Jan 1 120,000
Return on plan assets (squeeze) 12,000 50,000 Benefits paid
Contributions to the fund 200,000
282,000 Dec 31

c. Remeasurement to net defined benefit liability/asset

Interest income on plan assets 10,375
Return on plan assets (12,000)
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Gain ( 1,625)
 =======

Illustration: Return and interest income on plan assets

Fair value of plan assets, Jan 1 1,000,000
Interest income (actual) 200,000
Unrealized gains from fair value changes (actual) 100,000
Costs of managing plan assets 20,000
Tax on gross returns 10%
Discount rate 12%

Requirements: Compute the following:

a. Return on plan assets
b. Ending balance on the fair value of plan assets
c. Amounts recognized in profit and loss and other comprehensive income

Solutions:
a. Return on plan assets
Note: Costs of managing the fund and taxes are deducted when determining the return on plan
assets

Interest income (actual) 200,000

Unrealized gains from fair value changes (actual) 100,000
-----------
Gross return on plan assets 300,000
Less: Costs of managing plan assets ( 20,000)
Taxes (300,000 x 10%) (30,000)
------------
Return on plan assets 250,000
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b. FVPA
Fair value of plan assets
Jan 1 1,000,000
Return on plan assets 250,000 - Benefits paid
Contributions to the fund -
1,250,000 Dec 31

c. Amounts recognized in P/L and OCI

Fair value of plan assets, Jan 1 1,000,000
Multiply by: 12%
-------------
Interest income on plan assets recognized in P/L 120,000
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Interest income on plan assets 120,000
Return on plan assets ( 250,000)
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Remeasurement gain recognized in OCI (130,000)
 ========

Illustration: Remeasurement-Effect on asset ceiling

Fair value of plan assets, Jan 1 700,000
PV of defined benefit obligation, Jan 1 550,000
Fair value of plan assets, Dec 31 1,200,000
PV of defined benefit obligation 800,000
Discount rate 10%

The asset ceiling amounts are P100,000 and P250,000 on Jan 1 and Dec 31, respectively

Requirements: Compute the following:

a. Interest on the effect of asset ceiling
b. Difference between the change in the effect of the asset ceiling and interest on the effect of the
asset ceiling

Solutions:
a. Interest on the effect of asset ceiling
Jan 1 Dec 31 Change
FVPA 700,000 1,200,000
PV of DBO 550,000 800,000
Surplus 150,000 400,000
Asset ceiling 100,000 250,000
Effect of asset ceiling 50,000 150,000 100,000

Effect of the asset ceiling-Jan 1 50,000

Multiply by: Discount rate 10%
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Interest on the effect of the asset ceiling-P/L 5,000
======
b. Remeasurement-difference between interest and change
Interest on the effect of the asset ceiling 5,000
Less: Change in the effect of the asset ceiling 100,000
------------
Remeasurement recognized in OCI 95,000
========
Reconciliation:
Interest on the effect of the asset ceiling – P/L 5,000
Remeasurement (loss) – OCI 95,000
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Total change in the effect of the asset ceiling 100,000
========
Illustration: Comprehensive
Information on the ABC Co.’s defined benefit plan is shown below:
 The fair value of the plan assets on Jan 1, 20x1 was P1,800,000.
 The actuarial valuation of the defined benefit obligation on Jan 1, 20x1 was P2,000,000.
 The actuarial present value of future benefits earned by employees for services rendered in
20x1 amounted to P300,000.
 During the year, ABC Co. amended its retirement plan. The amendment increased the present
value of the defined benefit obligation by P400,000, 20% of which relates to benefits that have
already vested. The remaining portion will vest in 5 years.
 Changes in actuarial assumptions resulted to a decrease of P160,000 in the present value of the
defined benefit obligation. It was also determined that there was a P20,000 decrease in the fair
value of the plan assets due to changes in fair values.
 The realized gains on the investments in the plan assets in 20x1 amounted to P280,000.
 Benefits paid during 20x1 amounted to P50,000. No contributions were made to the fund
during 20x1.
 The discount rate is 9%.

Requirements: Compute the following:

a. Net defined benefit liability/asset on Dec 31, 20x1
b. Defined benefit cost for 20x1

Solutions:
a. Net defined benefit liability (asset)-Dec 31

PV of defined benefit obligation

2,000,000 Jan 1
Benefits paid 50,000 300,000 Current service cost
Actuarial gain 160,000 400,000 Past service cost
180,000 Interest cost (2M x 9%)
Dec 31 2,670,000

Fair value of plan assets

Jan 1 1,800,000
 Return on plan assets 260,000 50,000 Benefits paid
Contributions to the fund -
2,010,000 Dec 31

FVPA, Dec 31 2,010,000

PV of DBO, Dec 31 2,670,000
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Net defined benefit liability-Dec 31 (deficit) ( 660,000)
=========
b. Defined benefit cost (Alternative computation)
Current service cost 300,000
Past service cost 400,000
Net loss on settlement of plan during the year -
Net interest on the net defined liability (asset) 18,000
Defined benefit cost recognized in profit or loss 718,000
Actuarial (gain) loss (160,000)
Diff. between interest income and return on PA ( 98,000)
Diff. between int. on effect and change in the -
Effect
Defined benefit cost recognized on OCI (258,000)
Total defined benefit cost 460,000
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