According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.


Answer: requires recognition of an asset

Which of the following statements is true about postretirement health care benefits?

a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.


Answer: The beneficiary is the retiree, spouse, and other dependents

Which of the following disclosures of pension plan information would not normally be required?

a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts


Answer: The amount of prior service cost changed or credited in previous years

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.

Expected Return
Corridor on Plan Assets


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: Yes Yes

Which of the following is true of pension termination?

a. Companies can terminate a pension plan whenever they wish to do so.
b. Terminating a pension plan is illegal in U.S.
c. A company must start a new defined benefit plan after it eliminates the old one.
d. FASB requires recognition in earnings of a gain or loss when a pension obligation is settled.


Answer: FASB requires recognition in earnings of a gain or loss when a pension obligation is settled

A pension fund gain or loss that is caused by a plant closing should be

a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.


Answer: recognized immediately as a gain or loss on the plant closing

The actuarial gains or losses that result from changes in the projected benefit obligation are called

The actuarial gains or losses that result from changes in the projected benefit obligation are called

Asset Liability

Gains & Losses Gains & Losses


a. Yes Yes
b. No No
c. Yes No
d. No Yes


Answer: No Yes

A pension liability is reported when

a. the projected benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.


Answer: the projected benefit obligation exceeds the fair value of pension plan assets

A pension asset is reported when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the projected benefit obligation.


Answer: pension plan assets at fair value exceed the projected benefit obligation

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

a. both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation are usually less than before.
c. the expense and the liability should be recognized at the time of the plan change.
d. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.


Answer: both the accumulated benefit obligation and the projected benefit obligation are usually less than before

Gains and losses that relate to the computation of pension expense 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.


Answer: recorded currently and in the future by applying the corridor method which provides the amount to be amortized

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.


Answer: projected benefit obligation exceeds the fair value of the plan assets

When a company amends a pension plan, for accounting purposes, prior service costs should be

When a company amends a pension plan, for accounting purposes, prior service costs should be

a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.


Answer: recorded in other comprehensive income (PSC)

When a company adopts a pension plan, prior service costs should be charged to

a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.


Answer: Other comprehensive income (PSC)

Prior service cost is amortized on a

a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service life of active employees.
c. straight-line basis over 15 years.
d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.


Answer: years-of-service method or on a straight-line basis over the average remaining service life of active employees

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

a. an offset to the liability for prior service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).


Answer: pension asset/liability

One component of pension expense is actual return on plan assets. Plan assets include

a. assets that a company holds to earn a reasonable return, generally at minimum risk.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid pension cost.
d. None of these answers are correct.


Answer: assets that a company holds to earn a reasonable return, generally at minimum risk

The actual 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 changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
d. All of these answers are correct.


Answer: includes interest, dividends, and changes in the fair value of the fund assets

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

Amortization of
Fair value prior
of plan assets service cost


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: No Yes

The computation of pension expense includes all the following except

a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.


Answer: service cost component measured using current salary levels

The relationship between the amount funded and the amount reported for pension expense is as follows:

a. pension expense must 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.


Answer: pension expense may be greater than, equal to, or less than the amount funded.

In computing the service cost component of pension expense, the FASB concluded that

In computing the service cost component of pension expense, the FASB concluded that

a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.
d. All of these answers are correct.


Answer: the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense

Differing measures of the pension obligation can be based on

a. all years of service—both vested and nonvested—using current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. All of these answers are correct.



Answer: All of these answers are correct

The interest on the projected benefit obligation component of pension expense

a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.


Answer: reflects the rates at which pension benefits could be effectively settled

Which of the following is not a characteristic of a defined-contribution pension plan?

Which of the following is not a characteristic of a defined-contribution pension plan?

a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.
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 pension fund is borne by the employee.


Answer: The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan

Vested benefits

a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these answers.


Answer: are defined by all of these answers

In accounting for a defined-benefit pension plan

a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
b. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future salary levels promised to employees.


Answer: an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation


Answer: Projected benefit obligation

The accumulated benefit obligation measures

a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c. the level cost that will be sufficient, together with interest to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.


Answer: the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels

The projected benefit obligation is the measure of pension obligation that

a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.


Answer: is required to be used for reporting the service cost component of pension expense

In all pension plans, the accounting problems include all the following except

In all pension plans, the accounting problems include all the following except

a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.


Answer: determining the level of individual premiums

In a defined-benefit plan, the process of funding refers to

a. determining the projected 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 retirees' claims.
d. determining the amount that might be reported for pension expense.


Answer: making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims

In a defined-contribution plan, a formula is used that

a. defines the benefits that the employee will receive at the time of 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.


Answer: requires an employer to contribute a certain sum each period based on the formula

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation),

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?

a. Retirement and mortality rate.
b. Interest rates.
c. Benefit provisions of the plan.
d. All of these are considered.


Answer: All of these are considered

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 the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.


Answer: defines the benefits that the employee will receive at the time of retirement

True or False: Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

Answer: FALSE