CHAPTER 19
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
CHAPTER LEARNING OBJECTIVES
1. Discuss the fundamentals of pension plan accounting.
2. Use a worksheet for employer's pension plan entries.
3. Describe the accounting and amortization of prior service costs.
4. Explain the accounting and amortization for unexpected gains and losses.
5. Describe the requirements for reporting pension plans in financial statements.
*6. Identify the differences between pensions and postretirement healthcare benefits.
*7. Contrast accounting for pensions to accounting for other postretirement benefits.
,19-2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. A pension plan is contributory when the employer makes payments to a funding agency.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
2. Qualified pension plans permit deductibility of the employer’s contributions to the pension
fund.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
3. An employer does not have to report a liability on its balance sheet in a defined-benefit
plan.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication,
IMA: Reporting, IFRS: None
4. Employers are at risk with defined benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
5. Companies compute the vested benefit obligation using only vested benefits, at current
salary levels.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
6. The accumulated benefit obligation bases the deferred compensation amount on both
vested and nonvested service using future salary levels.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
7. Service cost is the expense caused by the increase in the accumulated benefit obligation
because of employees’ service during the current year.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
8. The interest component of pension expense in the current period is computed by
multiplying the settlement rate by the beginning balance of the projected benefit
obligation.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
9. Companies recognize the accumulated benefit obligation in their accounts and in their
financial statements.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
10. The Pension Asset / Liability account balance equals the difference between the projected
benefit obligation and the fair value of pension plan assets.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
11. Companies should recognize the entire increase in projected benefit obligation due to a
plan initiation or amendment as pension expense in the year of amendment.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
, Accounting for Pensions and Postretirement Benefits 19-3
12. The FASB makes it mandatory to use only the years-of-service method for amortization of
prior service cost.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, FSA, IFRS: None
13. When a company amends its defined benefit plan, and recognizes prior service, the
projected benefit obligation is increased to recognize this additional liability.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
14. The difference between the expected return and the actual return is referred to as the
unexpected gain or loss.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
15. The unexpected gains and losses from changes in the projected benefit obligation are
called asset gains and losses.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
16. The Accumulated Other Comprehensive Income (G/L) account is amortized only if it
exceeds 10 percent of the larger of the beginning balances of the projected benefit
obligation or the market-related plan assets value.
Ans: T, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
17. If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor,
the net gains and losses are subject to amortization.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
18. Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the
balance sheet.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
19. Companies must disclose a reconciliation of how the projected benefit obligation and the
fair value of plan assets changed during the year either in their financial statements or in
the notes.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*20. Benefits under a pension plan can include the retiree, the retiree's spouse, and other
dependents.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*21. The attribution period is the period of time over which the postretirement benefit cost
accrues.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*22. The expected postretirement benefit obligation is the actuarial present value of future
benefits attributed to employees’ services rendered to a particular date.
, 19-4 Test Bank for Intermediate Accounting, Eighteenth Edition
Ans: F, LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication,
IMA: Reporting, IFRS: None
*23. At the date an employee is fully eligible (at the end of the attribution period), the APBO
and the EPBO for that employee are equal.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*24. The expected postretirement benefit obligation (EPBO) is not recognized in the financial
statement or disclosed in the notes.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*25. A Postretirement Liability will be reported when the expected postretirement benefit
obligation (EPBO) exceeds the fair value of the postretirement plan assets.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
MULTIPLE CHOICE—Conceptual
26. In determining the present value of the prospective benefits (often referred to as the
projected benefit obligation), which of the following are not considered by the actuary?
a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan
d. insurance provisions of the plan
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
27. 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.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
28. 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.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
29. 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.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
CHAPTER LEARNING OBJECTIVES
1. Discuss the fundamentals of pension plan accounting.
2. Use a worksheet for employer's pension plan entries.
3. Describe the accounting and amortization of prior service costs.
4. Explain the accounting and amortization for unexpected gains and losses.
5. Describe the requirements for reporting pension plans in financial statements.
*6. Identify the differences between pensions and postretirement healthcare benefits.
*7. Contrast accounting for pensions to accounting for other postretirement benefits.
,19-2 Test Bank for Intermediate Accounting, Eighteenth Edition
TRUE-FALSE—Conceptual
1. A pension plan is contributory when the employer makes payments to a funding agency.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
2. Qualified pension plans permit deductibility of the employer’s contributions to the pension
fund.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
3. An employer does not have to report a liability on its balance sheet in a defined-benefit
plan.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication,
IMA: Reporting, IFRS: None
4. Employers are at risk with defined benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
5. Companies compute the vested benefit obligation using only vested benefits, at current
salary levels.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
6. The accumulated benefit obligation bases the deferred compensation amount on both
vested and nonvested service using future salary levels.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
7. Service cost is the expense caused by the increase in the accumulated benefit obligation
because of employees’ service during the current year.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
8. The interest component of pension expense in the current period is computed by
multiplying the settlement rate by the beginning balance of the projected benefit
obligation.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
9. Companies recognize the accumulated benefit obligation in their accounts and in their
financial statements.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA: Reporting,
IFRS: None
10. The Pension Asset / Liability account balance equals the difference between the projected
benefit obligation and the fair value of pension plan assets.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
11. Companies should recognize the entire increase in projected benefit obligation due to a
plan initiation or amendment as pension expense in the year of amendment.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
, Accounting for Pensions and Postretirement Benefits 19-3
12. The FASB makes it mandatory to use only the years-of-service method for amortization of
prior service cost.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, FSA, IFRS: None
13. When a company amends its defined benefit plan, and recognizes prior service, the
projected benefit obligation is increased to recognize this additional liability.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
14. The difference between the expected return and the actual return is referred to as the
unexpected gain or loss.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
15. The unexpected gains and losses from changes in the projected benefit obligation are
called asset gains and losses.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
16. The Accumulated Other Comprehensive Income (G/L) account is amortized only if it
exceeds 10 percent of the larger of the beginning balances of the projected benefit
obligation or the market-related plan assets value.
Ans: T, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
17. If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor,
the net gains and losses are subject to amortization.
Ans: F, LO: 4, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
18. Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the
balance sheet.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
19. Companies must disclose a reconciliation of how the projected benefit obligation and the
fair value of plan assets changed during the year either in their financial statements or in
the notes.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*20. Benefits under a pension plan can include the retiree, the retiree's spouse, and other
dependents.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*21. The attribution period is the period of time over which the postretirement benefit cost
accrues.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*22. The expected postretirement benefit obligation is the actuarial present value of future
benefits attributed to employees’ services rendered to a particular date.
, 19-4 Test Bank for Intermediate Accounting, Eighteenth Edition
Ans: F, LO: 6, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication,
IMA: Reporting, IFRS: None
*23. At the date an employee is fully eligible (at the end of the attribution period), the APBO
and the EPBO for that employee are equal.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*24. The expected postretirement benefit obligation (EPBO) is not recognized in the financial
statement or disclosed in the notes.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
*25. A Postretirement Liability will be reported when the expected postretirement benefit
obligation (EPBO) exceeds the fair value of the postretirement plan assets.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communication, AICPA BC: None, AICPA AC: Reporting, AICPA PC: Communication, IMA:
Reporting, IFRS: None
MULTIPLE CHOICE—Conceptual
26. In determining the present value of the prospective benefits (often referred to as the
projected benefit obligation), which of the following are not considered by the actuary?
a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan
d. insurance provisions of the plan
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
27. 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.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA PC:
Problem Solving, IMA: Reporting, IFRS: None
28. 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.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Reflective, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
29. 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.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation AICPA
PC: Problem Solving, IMA: Reporting, IFRS: None
