Intermediate Accounting - Chapter 20 Exam Questions and Answers Latest Update (Graded A+)

Intermediate Accounting - Chapter 20 Exam Questions and Answers Latest Update (Graded A+) 21 In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), 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 factors. - Answers d. all of these factors. 22 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. - Answers c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. 23 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. - Answers d. determining the level of individual 24 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. - Answers c. requires an employer to contribute a certain sum each period based on the formula. 25 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. - Answers b. defines the benefits that the employee will receive at the time of retirement. 26 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 usually determined by an employee's three highest years of salary 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 are borne by the employee. - Answers b. The benefits to be received by employees are usually determined by an employee's three highest years of salary defined by the terms of the plan. 27 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. - Answers a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised. 28 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 - Answers c. Projected benefit obligation 29 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. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. d. the shortest possible period for funding to maximize the tax deduction. - Answers a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. 30 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. - Answers a. is required to be used for reporting the service cost component of pension expense. 31 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 d. all of these. 32 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 d. are defined by all of these. 33 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. - Answers d. pension expense may be greater than, equal to, or less than the amount funded. 34 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. - Answers a. service cost component measured using current salary levels. 35 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 c. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense. 36 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. - Answers b. reflects the rates at which pension benefits could be effectively settled. 37 One component of pension expense is expected return on plan assets. Plan assets include