Joyce Anne Luna

BSA401
CHAPTER 17 POSTEMPLOYMENT BENEFITS

Multiple Choice (IAA)

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 amounts by employer and employees.

2. Which is not a characteristic of defined contribution plan?

a. The employer contribution each period is based on a formula.

b. The benefits to be 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 the risk of loss from the assets contributed to the plan is
borne by the employees.

3. A formula in a defined contribution plan.

a. Defines the benefits that the employees 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.

4. Which statement is true concerning the 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
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.

5. Which statement characterizes defined 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.

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 expenses and
there is a 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.

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.

8. In accounting for a defined benefit plan

a. An appropriate funding must be established to ensure that enough fund would be

available for 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.

9. The formula in a defined benefit plan

a. Requires that the benefit of gain or the 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.

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 benefit or defined contribution plan

d. Both defined benefit and defined contribution plan

Multiple Choice (PAS 19)

1. The components of defined benefit cost include all, except

a. Service cost

b. Net interest

c. Remeasurements

d. Contribution to the plan

2. The service cost of a defined benefit plan comprises all, except

a. Current service cost

b. Past service cost

c. Gain or loss on plan settlement

d. Net interest

3. Which of the following components of defined benefit cost shall be recognized

through other comprehensive income?

a. Current service cost

b. Past service cost

c. Net interest

d. Remeasurements

4. 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.

5. When an entity amends a pension plan, past service cost should be

a. Treated as a prior period adjustment because no future periods are benfited.

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.

6. 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.

7. 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.

8. 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.

9. Plan assets are assets held by a long-term benefit fund and must satisfy all of the
following conditions, except

a. The assets 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 can be returned to the entity even if the remaining assets
are insufficient to meet all employee benefit obligations.

10. 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

b. Aggregate policy

c. Annuity

d. Unconditional insurance policy

Problem 1 (IAA)

Jessabel Company has established a defined benefit pension plan for an employee.
Annual payments under the pension plan are equal to the employee’s highest lifetime
salary multiplied by 3% multiplied by number of years with the entity.

On December 31, 2020, the employees had worked for Jessabel Company for 15 years.
The current salary is P500,000.

The employee is expected to retire in 5 years and the salary increases are expected to
average 4% per year during that period.

The employee is expected to live for 6 years after retiring and will receive the first
annual pension payment one year after retirement. The discount rate is 12%

Future value of 1 at 4% for 5 periods 1.217

PV of an ordinary annuity of 1 at 12% for 6 periods
4.111 PV of 1 at 12% for 5 periods
0.567

What is the projected benefit obligation on December 31, 2020?

a. 638, 269

b. 225, 000

c. 524, 460

d. 608, 500

Problem 2 (IAA)

A director of Ester Company shall receive a retirement benefit of 20% of final salary per
annum for a contractual period of three years.

The anticipated salary is P1,000,000 for 2020, P1,200,000 for 2021 and P1,500,000 for
2022.

The discount rate is 10%. The present value of 1 at 10% is 0.909 for one period and
0.826 for two periods.

Under the projected unit credit method, what is the estimated pension liability on
December 31, 2021?
a. 900,000

b. 520,500

c. 600,000

d. 545,280

Problem 3 (IAA)

ABC Company has a defined contribution plan that covers the existing employees. The
terms of the plan required ABC to contribute 5% of the annual employees’ salaries to
the retirement plan each year. The payroll records show the following annual salaries:

2020 P4,000,000
2021 P4,200,000

Required:

Prepare journal entry to record the employee benefit expense for 2020 and 2021.

Problem 4 (IFRS)

On February 15, 2021, Moon Company paid P300,000 contribution to a defined

contribution plan in exchange for services performed by employees in 2020.

Required:

Prepare journal entries to record the accrual of the benefit on December 31, 2020 and
the payment of the contribution on February 15, 2021.

Problem 5 (IFRS)

On December 31, 2020, Sun Company paid P400,000 contribution to a defined

contribution plan.
Of this amount, P350,000 is in part exchange for services performed by employees for
2020, and the balance of P50,000 is in respect of services to be performed in 2021.

Required:

Prepare journal entry to recognize the contribution on December 31, 2020.

Problem 6 (IAA)

Reese Company reported the following information with respect to a defined benefit
plan:

2020 2021

Employee Benefit Plan 850,000 1,000,000

Contribution 700,000 1,050,000

Required:

1. Prepare journal entries in 2020 and 2021.

2. Determine the amount of any prepaid or accrued benefit cost to be reported in

the statement of financial position for each year.

Problem 7 (IAA)

Rachel Company has established a defined benefit pension plan for the employees.

Annual payments under the pension plan are equal to 3% of an employee’s highest
lifetime salary multiplied by the number of years with the entity.

An employee’s salary in 2020 was P300,000.

The employee is expected to retire in 10 years, and the salary increases are expected
to average 4% per year during that period.

On December 31, 2020, the employee has worked for 12 years.

The future value of 1 at 4% for 10 periods is 1.48.

Required:
Determine the amount of annual pension payment to be used in computing the
employee’s projected benefit obligation on December 31, 2020.

Problem 8 (IAA)

Woodstock Company has established a defined benefit pension plan for the employees.

Annual payments under the pension plan are equal to an employee’s highest lifetime
salary multiplied by 2% multiplied by number of years with the entity.

On December 31, 2020, an employee had worked for Woodstock Company for 10
years. The current salary of the employee is P500,000.

The employee is expected to retire in 25 years and the salary increases are expected to
average 3% per year during that period.

The employee is expected to live for 15 years after retiring and will receive the first
annual pension payment one year after retirement.

The discount rate is 8%. The relevant present value and future value factors are:

FV of 1 at 3% for 25 periods 2.094

PV of an ordinary annuity of 1 at 8% for 15 periods 8.559

PV of 1 at 8% for 25 periods 0.146

Required:

Determine the projected benefit obligation on December 31, 2020.

Problem 9 (IAA)

Wendy Company has established a defined benefit plan for the employees. Annual
payments under the plan are equal to highest lifetime salary multiplied by 2% multiplied
by number of years with the entity. On December 31, 2020, an employee had worked
with the entity for 15 years. The current salary of the employee is P600,000.

The employee is expected to retire in 10 years and the increase in salary is expected to
to be 4% per year. The discount rate is 10%. The employee is expected to live for 8
years after retirement and shall receive the first annual pension payment one year after
retirement.

FV of 1 at 4% for 10 periods 1.480

PV of an ordinary annuity of 1 at 10% for 8 periods 5.335

PV of 1 at 10% for 10 periods 0.386

Required:

Determine the projected benefit obligation on December 31, 2020.

Problem 10 (IAA)

On January 1, 2020, Alpha Company agrees to pay a lump sum pension to the
employees equal to 5% of their final salary times the number of years worked after
January 1, 2020. It is estimated that the salary of a certain employee for 2029, the last
year with the entity, will be P1,500,000. The appropriate interest rate is 12%. The
mathematical table shows the following present value of 1 at 12%:

Period PV of 1

7 0.452

8 0.404

9 0.361

10 0.322

Required:

Determine the current services and interest components of the employee benefit
expense related to the employee for 2020, 2021, 2022. Use the projected unit credit
method.
Problem 11 (IFRS)

A director of Easy Company receives a retirement benefit of 10% of final salary per
annum for a contractual period of three years. The director does not contribute to the
scheme.

The anticipated salary of the director over three years is P1,000,000 for 2020,
P1,200,000 for 2021 and P1,440,000 for 2022.

The discount rate is 5%. The present value of 1 at 5% for:

One period 0.9524

Two periods 0.9070

Three periods 0.8638

Required:

1. Determine the current service cost for 2020, 2021, and 2022.

2. Prepare a schedule showing the pension liability on December 31 each year and
the interest expense for 2020, 2021 and 2022.