 CHAPTER 17 

Employee Compensation—Payroll,
Pensions, and Other Compensation Issues
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions

1 Why report earned but unused compensated absences as liabilities

2 FASB Statement No. 43--criteria for recognizing liabilities for
compensated absences
3 FASB Statement No. 43--treatment of sick days
4 Components of the employer’s payroll tax expense
5 Components of the employer’s payroll tax expense
6 Taxes paid by both the employer and the employee
7 GAAP treatment of earned but unused paid vacations
8 Characteristics of defined contribution plans
9 Characteristics of defined benefit plans
10 Issues in accounting for defined benefit plans
11 FASB Statement No. 87--concept of minimum pension liability
12 Recognition of value of pension fund assets and projected benefit
obligation
13 Purpose of minimum liability requirement
14 Definition of accumulated benefit obligation
15 FASB Statement No. 87--elements of minimum liability computation
16 Deferred gain--actual return on pension assets is greater than expected
17 Projected benefit obligation as a measure of pension obligation
18 FASB Statement No. 87--treatment of prior service costs
19 Components of net periodic pension cost
20 FASB Statement No. 87--treatment of transition gains/losses
21 Service cost calculated using future compensation levels
22 FASB Statement No. 87--reconciliation of funding status included in
notes
23 Definition of vested benefits
24 Components of net pension cost for defined benefit plan
25 Comparison of concepts--pensions vs. postretirement benefits
26 Methods associated with accounting for postretirement benefits
27 Determining the interest cost component for postretirement benefits
28 International accounting standards for pensions
29 International accounting standards for pensions

131
132 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

Computational Questions
30 Computation of bonus amount based on income
31 Computation of bonus amount based on income
32 Computation of earnings considering taxes
33 Computation of earnings considering taxes
34 Computation of liability amount for compensated absences
35 Computation of service cost
36 Computation of actual return on plan assets
37 Computation of postretirement benefit liability
38 Computation of total pension liability
39 Computation of prepaid pension cost
40 Computation of net gain/loss component of pension cost
41 Computation of projected benefit obligation
42 Computation of actual return on plan assets
43 Determination of accrued pension cost
44 Computation of minimum amortization for prior service costs
45 Computation of net periodic pension cost
46 Computation of net periodic pension cost
47 Computation of pension expense for the period
48 Computation of total pension liability
49 Computation of pension expense for the period
50 Computation of net pension liability
51 Computation of intangible asset balance
52 Computation of prepaid pension cost

PROBLEMS
1 Journalize gross payroll and taxes amount
2 Journalize payroll payment and accrual of tax liabilities
3 Computation of liability for compensated absences
4 Computation of income before bonuses and taxes
5 Decide on bonus plan for executives
6 Journalize pension plan entries, determine prepaid/accrued balance
7 Computation of service cost amount
8 Computation of amortization of prior service cost, annual contribution to
fund pension service cost
9 Computation of difference between actual and expected returns
10 Computation of gain/loss component and explain treatment
11 Determine net periodic pension cost
12 Compute and journalize minimum pension liability and adjustment
13 Computation of balance of prepaid/accrued pension cost
14 Journalize postretirement cost/funding, compute prepaid/accrued cost
15 Journalize postretirement cost/funding, compute prepaid/accrued cost
Test Bank, Intermediate Accounting, 14th ed. 133

16 Comprehensive pension accounting problem

17 Evaluation of the use of the projected benefit obligation in pension
accounting
18 Factors to consider in choosing a discount rate for pension accounting
19 Comparison of pensions and other post retirement benefits

MULTIPLE CHOICE QUESTIONS

d 1. Which of the following accounting principles best describes the rationale for
LO1 reporting a liability for earned but unused compensated absences?
a. Historical cost
b. Full disclosure
c. Materiality
d. Matching

c 2. Which of the following criteria is not required for the recognition of a liability
LO1 for compensated absences under FASB Statement No. 43?
a. The amount of the obligation must be estimable.
b. Payment of the obligation must be probable.
c. Payment of the obligation will require the use of current assets.
d. The compensation either vests with the employee or can be carried
forward to subsequent years.

a 3. Each full-time employee of Sunshine Greenhouse is entitled to ten paid sick

LO1 days each year. The sick pay is not vested, but any unused sick days can
be carried over to subsequent years. Under FASB Statement No. 43,
Sunshine Greenhouse should
a. recognize sick pay as an expense when actually paid.
b. recognize an estimated current liability for unused sick pay at the end of
each period.
c. recognize an estimated noncurrent liability for unused sick pay at the
end of each period.
d. accrue or not accrue sick pay based on historical rates of absenteeism.

d 4. Which of the following taxes is not included in the payroll tax expense of the
LO1 employer?
a. State unemployment taxes
b. Federal unemployment taxes
c. FICA taxes
d. Federal income taxes

d 5. Which of the following payroll taxes are paid by the employer?

134 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

LO1 a. FICA taxes

b. Federal unemployment taxes
c. State unemployment taxes
d. All of the above

a 6. Which of the following taxes must be paid by both the employee and the
LO1 employer?
a. Social security tax (FICA)
b. State unemployment tax
c. State withholding tax
d. Federal unemployment tax

a 7. Laid Back Corp. follows the practice of paying all employees for vacation.
The
LO1 vacation pay is not vested, but it carries over for one year if unused. Under
GAAP, the obligation for earned but unused vacation should be
a. accrued as a current liability.
b. disclosed as a contingent liability.
c. ignored until incurred.
d. accrued or not accrued according to the judgment of management.

b 8. Which of the following statements characterizes defined contribution plans?

LO3 a. They are more complex in construction 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.

b 9. Which of the following statements characterizes defined benefit plans?

LO2 a. They are comparatively simple in construction and raise few accounting
issues for employers.
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. All of the above.

c 10. Which of the following is not an issue in accounting for defined benefit
plans?
LO3 a. The amount of pension expense to be recognized
b. The amount of pension liability to be reported
c. The amount of funding (contributions) required by the plan
d. Disclosures needed to supplement the financial statements
Test Bank, Intermediate Accounting, 14th ed. 135

a 11. FASB Statement No. 87 included the concept of a minimum pension liability
LO4 requiring an employer to recognize a liability at least equal to the
a. unfunded accumulated benefit obligation.
b. unfunded projected benefit obligation.
c. fair value of pension plan assets.
d. accrued pension costs.

d 12. When the value of the pension fund assets is greater than the projected
benefit
LO4 obligation, the difference is
a. reported as prepaid pension cost.
b. reported as deferred pension cost.
c. reported as a contra equity adjustment.
d. not recognized on the balance sheet.

d 13. The FASB established the minimum liability requirement to reflect

LO4 a. the accumulated benefit obligation.
b. the vested benefit obligation.
c. overdue employer contributions.
d. unfunded pension cost.

d 14. What is measured by the accumulated benefit obligation?

LO4 a. The pension expense, computed by the plan formula applied to years of
service to date, assuming future salary levels.
b. The pension expense, computed by the plan formula applied to years of
service to date, using existing salary levels.
c. The pension obligation, computed by the plan formula applied to years
of service to date, assuming future salary levels.
d. The pension obligation, computed by the plan formula applied to years
of service to date, using existing salary levels.

a 15. Under FASB Statement No. 87, the minimum liability is computed using the
LO4 difference between the
a. accumulated benefit obligation and the fair value of plan assets.
b. net periodic pension cost and the current period contribution.
c. fair value of plan assets and the market-related value of plan assets.
d. projected benefit obligation and the market-related value of plan assets.

b 16. If the actual return on pension fund assets exceeds the expected return for
the
LO4 period, the difference is
a. a deferred loss.
b. a deferred gain.
c. recognized as a loss in the current period.
136 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

d. recognized as a gain in the current period.

d 17. The projected benefit obligation is the measure of pension obligation that
LO3 a. can no longer be used under GAAP as an estimate for reporting the
service cost component of pension expense.
b. is not an allowable estimate for reporting the service cost component of
pension expense for defined benefit plans.
c. is one of several allowable estimates for reporting the service cost
component of pension expense.
d. is the only allowable estimate for reporting the service cost component
of pension expense.

c 18. FASB Statement No. 87 states that prior service cost should be
LO4 a. offset against current service cost.
b. recognized in the period of plan adoption or amendment.
c. amortized over the expected service period.
d. recorded as a prior period adjustment.

c 19. Which of the following is not a component of net periodic pension cost?
LO4 a. Interest cost
b. Amortization of transition gain or loss
c. Benefits paid to retirees
d. Amortization of prior service cost

b 20. FASB Statement No. 87 states that transition gains or losses should be
LO4 a. recorded as a prior period adjustment.
b. amortized on a straight-line basis.
c. offset against current service cost.
d. recognized in the period of plan adoption or amendment.
Test Bank, Intermediate Accounting, 14th ed. 137

a 21. The FASB's conclusion relating to the computation of the service cost
LO4 component of pension expense is that
a. the projected benefit obligation computed using future salary levels
provides a reasonable measure of present pension obligation and
expense.
b. the projected benefit obligation computed using present salary levels
provides a reasonable measure of present pension obligation and
expense.
c. the projected benefit obligation computed using present salary levels
provides a reasonable measure of future pension obligation and
expense.
d. the projected benefit obligation computed using future salary levels
provides a reasonable measure of future pension obligation and
expense.

a 22. FASB Statement No. 132 requires that the notes accompanying the
financial
LO5 statements include a schedule reconciling the
a. funded status of the plan with amounts reported in the balance sheet.
b. current period employer contributions with pension expense reported in
the income statement.
c. projected benefit obligation and the accumulated benefit obligation.
d. actual return on plan assets with the expected return.

d 23. The vested benefits of an employee in a pension plan represent benefits

LO3 a. to be paid to the retired employee in the current year.
b. to be paid to the retired employee in subsequent years.
c. to be paid from funds currently in the hands of an independent trustee.
d. that are not contingent on the employee’s continuing in the service of
the employer.

d 24. Which of the following components should be included in the calculation of

net
LO4 pension cost recognized for a period by an employer sponsoring a defined
benefit pension plan?
Actual Return Amortization of
on Plan Assets, Unrecognized Prior Interest
If Any Service cost, If Any Cost
a. No No Yes
b. Yes No Yes
138 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

c. Yes Yes No
d. Yes Yes Yes

a 25. Which of the following concepts for postretirement benefit plans is

comparable
LO7 to the projected benefit obligation (PBO) of pension plans?
a. Accumulated Postretirement Benefit Obligation (APBO)
b. Expected Postretirement Benefit Obligation (EPBO)
c. Actual return on plan assets
d. Expected return on plan assets

b 26. Which of the following statements is correct?

LO7 a. Minimum (corridor) amortization of net unrecognized gain or loss is not
allowed for postretirement benefit plans.
b. Immediate recognition of gains and losses is allowed for postretirement
benefit plans but not for pension plans.
c. Immediate recognition of gains and losses is allowed for pension plans
but not for postretirement benefit plans.
d. Minimum (corridor) amortization of net unrecognized gain or loss is the
only amortization method allowed for postretirement benefit plans.

c 27. The interest cost component for other postretirement benefits is determined
LO7 using
a. the settlement rate of interest.
b. the rate of return on high quality fixed-income investments with cash
flows matching the timing and amounts of expected benefit payments.
c. both a and b.
d. neither a or b.

b 28. International accounting standards for pension currently in effect

LO6 a. allow both the accrued benefit and projected benefit methods.
b. allow only the accrued benefit method.
c. allow only the projected benefit method.
d. do not allow either the accrued benefit or projected benefit methods.

d 29. Which of the following is not correct?

LO6 a. International accounting standards for pensions (IAS 19) do not include
any provisions for the recognition of an additional minimum liability.
b. International accounting standards for pensions (IAS 19) do not allow for
the recognition of a net pension asset in some circumstances.
c. International accounting standard for pensions (IAS 19) include the
same 10% corridor amount in calculating the amortization of deferred
gains and losses as found in U.S. GAAP.
Test Bank, Intermediate Accounting, 14th ed. 139

d. International accounting standards for pensions (IAS 19) recognized

pension gains and losses immediately as part of comprehensive
income.

d 30. Wright, Inc. has an incentive compensation plan under which the sales
LO2 manager receives a bonus equal to 10 percent of the company's income
after deductions for bonus and income taxes. Income before bonus and
income taxes is $400,000. The effective income tax rate is 30 percent.
How much is the bonus (rounded to the nearest dollar)?
a. $40,000
b. $30,108
c. $28,000
d. $26,168

a 31. Washington Corporation provides an incentive compensation plan under

which
LO2 its president is to receive a bonus equal to 10 percent of Washington's
income in excess of $100,000 before deducting income tax but after
deducting bonus. If income before income tax and bonus is $320,000 and
the effective tax rate is 40 percent, the amount of the bonus should be
a. $20,000.
b. $22,000.
c. $32,000.
d. $44,000.

a 32. During the first week of January, Sam Jones earned $200. Assume that
FICA
LO1 taxes are 7.65 percent of wages up to $50,000, state unemployment tax is
5.0 percent of wages up to $13,000, and federal unemployment tax is 0.8
percent of wages up to $13,000. Assume that Sam has voluntary
withholdings of $10 (in addition to taxes) and that federal and state income
tax withholdings are $18 and $6, respectively. What amount is the check,
net of all deductions, that Sam received for the week’s pay?
a. $150.70
b. $141.70
c. $140.10
140 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

d. $155.20

b 33. During the first week of January, Sam Jones earned $200. Assume that
FICA
LO1 taxes are 7.65 percent of wages up to $50,000, state unemployment tax is
5.0 percent of wages up to $13,000, and federal unemployment tax is 0.8
percent of wages up to $13,000. Assume that Sam has voluntary
withholdings of $10 (in addition to taxes) and that federal and state income
tax withholdings are $18 and $6, respectively. What is the employer’s
payroll tax expense for the week, assuming that Sam Jones is the only
employee?
a. $6.32
b. $26.90
c. $10.00
d. $19.05

d 34. Northwest Company determined that it has an obligation relating to

LO1 employees’ rights to receive compensation for future absences attributable
to employees services already rendered. The
obligation relates to rights that vest, and payment of the compensation is
probable. The amounts of Northwest’s obligations as of December 31 are
reasonably estimated as follows:
Vacation pay...............................................................................$110,000
Sick pay....................................................................................... 80,000

In its December 31 balance sheet, what amount should Northwest report as

its liability for compensated absences?
a. $0
b. $80,000
c. $110,000
d. $190,000
Test Bank, Intermediate Accounting, 14th ed. 141

a 35. The following information relates to the defined benefit pension plan for the
LO4 McDonald Company for the year ending December 31, 2002.
Projected benefit obligation, January 1................................. $4,600,000
Projected benefit obligation, December 31........................... 4,729,000
Fair value of plan assets, January 1..................................... 5,035,000
Fair value of plan assets, December 31............................... 5,565,000
Expected return on plan assets............................................. 450,000
Amortization of deferred gain................................................ 32,500
Employer contributions.......................................................... 425,000
Benefits paid to retirees......................................................... 390,000
Settlement rate...................................................................... 10%

Service cost for the year would be

a. $59,000.
b. $94,000.
c. $129,000.
d. $390,000.

b 36. The following information relates to the defined benefit pension plan of the
LO4 McDonald Company for the year ending December 31, 2002:
Projected benefit obligation, January 1................................. $4,600,000
Projected benefit obligation, December 31........................... 4,729,000
Fair value of plan assets, January 1..................................... 5,035,000
Fair value of plan assets, December 31............................... 5,565,000
Expected return on plan assets............................................. 450,000
Amortization of deferred gain................................................ 32,500
Employer contributions.......................................................... 425,000
Benefits paid to retirees......................................................... 390,000
Settlement rate...................................................................... 10%

The actual return on plan assets for the year is

a. $105,000.
b. $495,000.
c. $503,500.
d. $530,000.
142 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

a 37. Tristan Company has a postretirement health benefit plan for its retirees.
The
LO4 following balances relate to this plan as of December 31, 2002:
Unamortized transition loss................................................... $190,000
Unrecognized prior service cost............................................ 150,000
Accumulated postretirement benefit obligation..................... 980,000
Fair value of plan assets....................................................... 500,000

How much should appear in Tristan’s balance sheet at December 31, 2002,
as postretirement benefit liability?
a. $140,000
b. $440,000
c. $480,000
d. $520,000

b 38. The following information relates to Irasly Inc. at December 31, 2002.
LO4 Fair value of plan assets.................................................. $1,520,000
Market related asset value............................................... 1,440,000
Accumulated benefit obligation........................................ 1,960,000
Projected benefit obligation............................................. 2,040,000
Unrecognized prior service cost...................................... 24,000
Prepaid/accrued pension cost......................................... 0

The total pension liability at December 31, 2002, for Irasly Inc. is
a. $0.
b. $440,000.
c. $480,000.
d. $520,000.

a 39. On January 1, 2002, Cubs Corporation adopted a defined benefit pension

LO4 plan. The plan's service cost of $150,000 was fully funded at the end of
2002. Prior service cost was funded by a contribution of $60,000 in 2002.
Amortization of prior service cost was $24,000 for 2002. What is the
amount of Cub's prepaid pension cost at December 31, 2002?
a. $36,000
b. $60,000
c. $84,000
d. $90,000
Test Bank, Intermediate Accounting, 14th ed. 143

d 40. The following information relates to the defined benefit pension plan of the
LO4 McDonald Company for the year ending December 31, 2002:
Projected benefit obligation, January 1........................... $4,600,000
Projected benefit obligation, December 31..................... 4,729,000
Fair value of plan assets, January 1................................ 5,035,000
Fair value of plan assets, December 31.......................... 5,565,000
Expected return on plan assets....................................... 450,000
Amortization of deferred gain........................................... 32,500
Employer contributions.................................................... 425,000
Benefits paid to retirees................................................... 390,000
Settlement rate................................................................. 10%

The net amount of the gain or loss component to be included in pension

cost for 2002 would be
a. $77,500.
b. $47,500.
c. $32,500.
d. $12,500.

b 41. On January 1, 2002, Crowther Co. estimated a projected benefit of

$440,000
LO4 based on a settlement rate of 12 percent. Pension benefits paid to retirees
totaled $60,000. Service costs for 2002 amounted to $148,000. The fair
value of the plan assets were $350,000 and $400,000 on December 31,
2001, and December 31, 2002, respectively. The projected benefit
obligation at December 31, 2002, was
a. $528,000.
b. $580,800.
c. $630,800.
d. $640,800.

d 42. Chester Company has a defined benefit plan. The fair value of plan assets
on
LO4 January 1, 2002, was $1,500,000. No unrecognized net loss or gain
existed. On December 31, 2002, the fair value of the plan assets was
$1,860,000. Benefits paid to retirees equaled $300,000. Company
contributions to the plan totaled $360,000. The settlement rate was 8
percent, and the expected long-term rate of return on plan assets was 10
percent. The actual return on plan assets was
a. $150,000.
b. $180,000.
c. $224,000.
d. $300,000.
144 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

b 43. Trueblu Corporation is a publicly held company that supplies tourniquets to

LO4 medical emergency centers. The company maintains a noncontributory
defined benefit pension plan for its employees. The Trueblu's actuary has
provided the following information for the year ended December 31, 2002:
Projected benefit obligation............................................. $800,000
Accumulated benefit obligation........................................ 700,000
Fair value of plan assets.................................................. 820,000
Service cost...................................................................... 240,000
Interest on projected benefit obligation........................... 24,000
Amortization of unrecognized prior service cost.............. 60,000
Expected and actual return on plan assets..................... 82,000

Prior contributions to the defined benefit pension plan equaled the amount
of net periodic pension cost accrued for the previous year end. If no
contributions have been made for 2002 pension cost, what amount should
Trueblu report in its December 31, 2002 balance sheet for accrued pension
cost?
a. $218,000
b. $242,000
c. $324,000
d. $406,000

c 44. On January 1, 2002, Dibble Co. amended its defined benefit plan resulting
in
LO4 an increase in the projected benefit obligation of $700,000. As of the date
of the amendment, Dibble Co. had 100 employees. Ten employees are
expected to leave at the end of each of the next ten years. The minimum
amount of amortization for prior service cost in 2003 (second year) is:
a. $140,000.
b. $127,273.
c. $114,545.
d. $101,818.
Test Bank, Intermediate Accounting, 14th ed. 145

d 45. Flash Inc. has a defined benefit plan for its employees. The following
LO4 information relates to this plan:
Projected benefit obligation, January 1, 2002................. $10,000,000
Fair value of plan assets, market-related asset value,
January 1, 2002............................................................... 10,400,000
Service cost--2002........................................................... 800,000
Actual return on plan assets--2002.................................. 900,000
Settlement rate................................................................. 10%
Long-term rate of return on assets.................................. 8%

A transition loss is being amortized in the amount of $20,000 per year.

There was no unrecognized prior service cost or unrecognized gains or
losses. Flash’s net periodic pension cost for the year was
a. $880,000.
b. $920,000.
c. $948,000.
d. $988,000.

c 46. The following information relates to the defined benefit pension plan of the
LO4 McDonald Company for the year ending December 31, 2002:
Projected benefit obligation, January 1........................... $4,600,000
Projected benefit obligation, December 31..................... 4,729,000
Fair value of plan assets, January 1................................ 5,035,000
Fair value of plan assets, December 31.......................... 5,565,000
Expected return on plan assets....................................... 450,000
Amortization of deferred gain........................................... 32,500
Employer contributions.................................................... 425,000
Benefits paid to retirees................................................... 390,000
Settlement rate................................................................. 10%

The net periodic pension cost reported in the income statement for 2002
would be
a. $11,500.
b. $24,000.
c. $36,500.
d. $59,000.
146 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

c 47. Blaine Inc. shows the following data relating to its pension plan for 2002:
LO4 Amortization of unrecognized net loss............................. $16,000
Amortization of unrecognized prior service cost.............. 28,000
Expected return on plan assets....................................... 32,000
Actual return on plan assets............................................ 36,000
Interest on projected benefit obligation........................... 70,000
Service cost...................................................................... 160,000

What amount should Blaine report for pension expense in 2002?

a. $206,000
b. $238,000
c. $242,000
d. $270,000

a 48. Sutton Inc. has a defined benefit plan for its employees. The following
LO4 information relates to this plan.
Dec. 2002 Dec. 2003
Prepaid pension cost.................................. $ 200,000 $ 250,000
Fair value of plan assets............................ 5,900,000 6,200,000
Market related asset value......................... 6,000,000 6,100,000
Accumulated benefit obligation.................. 5,500,000 6,400,000
Projected benefit obligation........................ 7,000,000 8,000,000

There was no prepaid/accrued pension cost at January 1, 2002. The total

pension liability at December 31, 2002, for Sutton is
a. $0.
b. $1,200,000.
c. $1,500,000.
d. $400,000.

c 49. Piston Corporation has the following pension information for the year ended
LO4 December 31, 2002.
Service cost...................................................................... $ 225,000
Contributions to the plan.................................................. 240,000
Actual return on plan assets............................................ 210,000
Projected benefit obligation (beginning of year).............. 2,700,000
Market-related and fair value of plan assets (beginning
of year)............................................................................ 1,800,000
 Assuming the expected return on plan assets and the settlement rate are
both 10 percent, what amount should Piston report for pension expense for
2002?
a. $225,000
b. $285,000
c. $315,000
d. $495,000

b 50. Sutton Inc. has a defined benefit plan for its employees. The following
LO4 information relates to this plan.
Dec. 2002 Dec. 2003
Prepaid pension cost.................................. $ 200,000 $ 250,000
Fair value of plan assets............................ 5,900,000 6,200,000
Market related asset value......................... 6,000,000 6,100,000
Accumulated benefit obligation.................. 5,500,000 6,400,000
Projected benefit obligation........................ 7,000,000 8,000,000

There was no prepaid/accrued pension cost at January 1, 2002. The net

pension liability at December 31, 2003, for Sutton is
a. $0.
b. $200,000.
c. $300,000.
d. $1,400,000.

b 51. The following information relates to Irasly Inc. at December 31, 2002.
LO4 Fair value of plan assets.................................................. $1,520,000
Market related asset value............................................... 1,440,000
Accumulated benefit obligation........................................ 1,960,000
Projected benefit obligation............................................. 2,040,000
Unrecognized prior service cost...................................... 24,000
Prepaid/accrued pension cost......................................... 0

The intangible asset on Irasly’s balance sheet at December 31, 2002, is

a. $0.
b. $24,000.
c. $440,000.
d. $520,000.

b 52. Robinson Company adopted a defined benefit pension plan on January 1,

LO4 2002. Robinson amortizes the prior service cost over 16 years and funds
prior service cost by making equal payments to the fund trustee at the end
 of each of the first ten years. The service cost is fully funded at the end of
each year. The following data are available for 2002:
Service cost........................................................................... $440,000
Prior service cost:
Amortized......................................................................... 166,800
Funded............................................................................. 228,800

If interest cost for 2002 is equal to the return on plan assets, then
Robinson’s prepaid pension cost at December 31, 2002, is
a. $0.
b. $62,000.
c. $166,800.
d. $228,800.

PROBLEMS
Problem 1
Employees of Harding Fabricators, Inc. earned gross wages of $140,000 during a
recent two-week period. Employee withholdings and payroll tax percentages are
presented below.
Federal withholding.................................................................. $33,000
Hospital insurance premiums................................................... 3,050
FICA......................................................................................... 7.5%
State unemployment................................................................ 2.0%
Federal unemployment............................................................ 0.8%

Only $78,000 of wages are subject to FICA, and $36,000 are subject to
unemployment taxes.
(1) Prepare the entry to record the gross payroll.
(2) Prepare the entry to record employer payroll taxes.

Solution 1
LO1
(1) Gross Payroll:
Wages Expense.................................................... 140,000
Federal Income Tax Withheld....................... 33,000
Hospital Insurance Payable.......................... 3,050
FICA Taxes Payable ($78,000 x 7.5%).............. 5,850
Wages Payable............................................. 98,100

(2) Employer Payroll Taxes:

Payroll Tax Expense............................................. 6,858
FICA Taxes Payable..................................... 5,850
State Unemployment Tax Payable............... 720
Federal Unemployment Tax Payable........... 288
 SUT ($36,000 x 2%) = $720
FUT ($36,000 x .8%) = $288

Problem 2
On August 31, 2002, payroll data from the records of Earthtec Enterprises showed:

Payroll: Factory wages............................................... $125,000

Office salaries............................................... 82,500
Sales salaries................................................ 98,000

Payroll deductions: Income tax withholding................................. $47,800

FICA tax (7.5%)............................................ ?

Wages and salaries not subject to FICA tax:

Factory wages............................................... $28,000
Office salaries............................................... 40,000
Sales salaries................................................ 45,000

Wages and salaries not subject to federal and state unemployment taxes:
Factory wages............................................... $60,000
Office salaries............................................... 80,000
Sales salaries................................................ 72,000

Provide the entries necessary to:

(1) Record the payment of the payroll on August 31, 2002.
(2) Record the employer’s payroll tax liabilities. (The federal unemployment tax
rate is 0.8 percent; the state unemployment tax rate is 5.4 percent.)

Solution 2
LO1
(1) Factory Wages Expense....................................... 125,000
Office Salaries Expense........................................ 82,500
Sales Salaries Expense........................................ 98,000
Cash................................................................. 243,262
Employees Income Tax Payable..................... 47,800
FICA Taxes Payable........................................ 14,438 *
To record the payment of August 31 payroll.
* Factory wages $125,000 - $28,000 = $ 97,000
Office salaries $ 82,500 - $40,000 = 42,500
Sales salaries $ 98,000 - $45,000 = 53,000
$192,500
x .075
$ 14,438 (rounded)
(2) Factory Payroll Tax Expense................................ 11,305
Office Payroll Tax Expense................................... 3,343
Sales Payroll Tax Expense................................... 5,587
FICA Taxes Payable........................................ 14,438
Federal Unemployment Tax Payable.............. 748
State Unemployment Tax Payable.................. 5,049
To record the employer’s payroll tax liabilities.
Computation of payroll tax expense by employee group:

Factory Office Sales Total

FICA Tax (7.5%):
($125,000 - $28,000) x 7.5% $ 7,275
($ 82,500 - $40,000) x 7.5% $3,188*
($ 98,000 - $45,000) x 7.5% $3,975 $14,438

Federal Unemployment Tax (.8%):

($125,000 - $60,000) x 0.8% 520
($ 82,500 - $80,000) x 0.8% 20
($ 98,000 - $72,000) x 0.8% 208 748

State Unemployment Tax (5.4%):

($125,000 - $60,000) x 5.4% 3,510
($ 82,500 - $80,000) x 5.4% 135
($ 98,000 - $72,000) x 5.4% 1,404 5,049
$11,305 $3,343 $5,587 $20,235
*rounded

Problem 3
Arctic Ice Inc. compensates its employees for certain absences. Employees can
receive one day vacation plus one day sick leave for each month worked during the
year. Unused vacation days may be carried forward, but unused sick leave expires
within the year of employment. Employees are compensated according to their
current pay rate. The following data were taken from the records for the year 2002.

Earned Vacation
Starting Sick Leave Carry Forward Vacation Days Current Pay
Employee Date Taken 2002 1/1/02 Taken 2002 per Day
S. Perkins 1/6/00 5 0 7 $70
M. Jordan 6/2/01 10 6 3 60
P. Ford 11/4/02 5 0 0 48
J. Worthy 7/28/02 2 0 1 79

Compute the amount that should be reported as a liability for compensated

absences on December 31, 2002.

Solution 3
LO1
Vacation Days Liability for
Employee Not Taken Rate per Day Compensated Absences
S. Perkins 5 $70 $ 350
M. Jordan 15 60 900
P. Ford 2 48 96
J. Worthy 4 79 316
$1,662
Problem 4
As an incentive, Wilson Enterprises awards an annual bonus to its branch
managers. This year, the bonus for the Glendale branch was $44,000. The bonus
agreement provides that each branch manager receives a bonus of 14 percent of
the branch income after deductions for the bonus and for income taxes. The
income tax rate is 30 percent.

Determine the income for the Glendale branch before the deductions for the bonus
and the income taxes.

Solution 4
LO2
Let B = Bonus, T = Income Taxes, and I = Income

Then,
B = $44,000
T = 0.30 (I - $44,000)
B = 0.14 (I - B - T)

Substituting for B and T in the last equation, and solving for I:

$44,000 = 0.14 [I - $44,000 - 0.30 (I - $44,000)]
$44,000 = 0.14 [I - $44,000 - 0.30 I + $13,200]
$44,000 = 0.14 I - $6,160 - 0.042 I + $1,848
$44,000 = 0.098 I - $4,312
$48,312 = 0.098 I
I = $492,980 (rounded)

Problem 5
West Communications is considering adopting a bonus plan for its executives.
Two plans are currently being evaluated. The first plan involves executives
receiving a bonus of 8 percent of company earnings calculated on income after
deduction for bonus but before deduction for income tax. The second plan involves
a bonus of 12 percent calculated on income after deductions for both bonus and
income tax. Income tax is 30 percent of income after bonus.

If income before bonus and taxes for the year is estimated to be $100,000, which
bonus plan would company executives prefer?
Solution 5
LO2
Plan A
B = 0.08 ($100,000 - B)
B = $8,000 - 0.08 B
1.08 B = $8,000
B = $7,407

Plan B
B = 0.12 ($100,000 - B - T)
T = 0.30 ($100,000 - B)

Substituting the second equation into the first and solving for B:

B = 0.12 [$100,000 - B - 0.30 ($100,000 - B)]

B = 0.12 ($100,000 - B - $30,000 + 0.3 B)
B = $12,000 - 0.12 B - $3,600 + 0.036 B
1.084 B = $8,400
B = $7,749

Plan B results in the highest bonus for company executives assuming an income
before bonus and taxes of $100,000.

Problem 6
The following data relate to the defined benefit pension plan of the Youngblood
Corp. for the years 2001-2003.

Net Periodic Employer Benefits Paid Actual Return

Year Pension Cost Contributions to Retirees on Fund Assets
2001 $255,000 $300,000 $105,000 $120,000
2002 300,000 300,000 114,000 150,000
2003 315,000 300,000 120,000 156,000

At December 31, 2000, the books of Youngblood Corp. reflected accrued pension
cost of $30,000. The fair value of pension fund assets at that date was
$1,380,000. The pension fund is administered by an independent trustee.

(1) Prepare the summary journal entries relating to the pension plan that would be
required on the books of Youngblood Corp. for 2001, 2002, and 2003.
(2) Determine the balance of the prepaid/accrued pension cost account at
December 31, 2003.
(3) Compute the fair value of pension fund assets as of December 31, 2003.
 Solution 6
LO4
(1) 2001 Pension Cost...................................................... 255,000
Prepaid/Accrued Pension Cost.......................... 45,000
Cash.............................................................. 300,000

2002 Pension Cost...................................................... 300,000

Cash.............................................................. 300,000

2003 Pension Cost...................................................... 315,000

Prepaid/Accrued Pension Cost..................... 15,000
Cash.............................................................. 300,000

(2) There is a zero balance in Prepaid/Accrued Pension Cost at December 31,

2003. ($30,000 credit - $45,000 debit + $15,000 credit) = $0

(3) Fair value of plan assets at December 31, 2000............................. $1,380,000

Add: Contributions ($300,000 x 3)......................................................... 900,000
Actual return ($120,000 + $150,000 + $156,000)................................ 426,000
Deduct: Benefits paid ($105,000 + $114,000 + $120,000)
(339,000)
Fair value of plan assets at December 31, 2003............................. $2,367,000

Problem 7
The following information relates to the defined benefit pension plan of the Ruder
Co.:
Projected benefit obligation, January 1, 2002.................................. $280,000
Projected benefit obligation, December 31, 2002............................ 307,500
Accumulated benefit obligation, January 1, 2002............................ 240,000
Accumulated benefit obligation, December 31, 2002...................... 256,000
Benefits paid to retirees during 2002............................................... 22,000
Contributions by employer during 2002........................................... 37,500
Settlement rate................................................................................. 10%

(1) Compute the amount of service cost for 2002.

(2) Prepare the reconciliation between the beginning and ending balances for the
projected benefit obligation disclosure as required by GAAP.
 Solution 7
LO4, LO5
(1) Projected benefit obligation, December 31, 2002............................ $307,500
Projected benefit obligation, January 1, 2002.................................. 280,000

Increase in projected benefit obligation........................................... $ 27,500

Less interest cost ($280,000 x 10%)......................................................
(28,000)
Plus benefits paid to retirees............................................................ 22,000
Service cost--2002........................................................................... $ 21,500

(2) Projected benefit obligation, January 1, 2002.................................. $ 280,000

Service cost...................................................................................... 21,500
Interest cost..................................................................................... 28,000
Benefits paid.....................................................................................
(22,000)
Projected benefit obligation, December 31, 2002............................ $ 307,500

Problem 8
On January 1, 2002, the Delhi Corp. amended its defined benefit pension plan to
provide increased retirement benefits for its 150 employees covered by the plan on
that date. As a result of the plan amendment, the projected benefit obligation as of
January 1, 2002, increased by $1,275,000. Management decided to amortize this
amount on a straight-line basis over the average remaining service life of the 150
employees. It is assumed that employees will retire at the rate of six employees
per year over the next 25 years. The prior service cost is to be funded with equal
annual contributions over a ten-year period. The first contribution is due at the end
of 2002 and the assumed interest rate for funding purposes is 12 percent. The
present value factor for an ordinary annuity for ten periods at 12 percent is 5.6502.

(1) Compute the annual amount of amortization of prior service cost.

(2) Compute the amount of the annual contribution required to fund the prior
service cost. (Round computation to the nearest dollar.)
(3) Assume that pension cost for 2002 excluding prior service cost amounted to
$120,000 and Delhi’s contributions to the pension fund totaled $110,000 in
addition to the funding of prior service cost. Prepare a summary journal entry
to record all pension-related amounts for 2002.
Solution 8
LO4
(1) [N(N + 1)/2] x D = Total future years of service
[25(26)/2] x 6 = 1,950

Average remaining service life = 1,950/150 = 13 years

Annual amortization of prior service cost: $1,275,000/13 = $98,077 (rounded)

(2) Annual funding of prior service cost: $1,275,000/5.6502 = $225,656 (rounded)

(3) Pension Cost ($120,000 + $98,077).................................. 218,077

Prepaid/Accrued Pension Cost.................................. 117,579
Cash ($110,000 + $225,656)..................................... 335,656

Problem 9
Reagan Western Wear, Inc. has a defined benefit pension plan covering its 120
employees. Information relating to the plan follows:
Fair value of plan assets, Jan. 1, 2002............................................ $3,400,000
Fair value of plan assets, Dec. 31, 2002......................................... 3,720,000
Market-related value of plan assets, Jan. 1, 2002........................... 2,760,000
Market-related value of plan assets, Dec. 31, 2002........................ 2,840,000
Benefits paid to retirees during 2002............................................... 168,000
Contributions to pension fund during 2002...................................... 120,000

Reagan expects a 10 percent return on its pension fund assets. Compute the
difference between the actual return and the expected return and explain how this
amount affects net periodic pension cost for 2002.

Solution 9
LO4
Increase in fair value of plan assets ($3,720,000 - $3,400,000).............. $320,000
Benefits paid during 2002................................................................ 168,000
Contributions made during 2002...................................................... (120,000)
Actual return on plan assets............................................................. $368,000
Less expected return on plan assets ($2,760,000 x 10%)..................... 276,000
Difference between actual and expected return.............................. $ 92,000

The $92,000 represents a deferred gain that is added to the other components in
computing net periodic pension cost for 2002. In effect the addition of this amount
adjusts the actual return to the expected return.
 Problem 10
Using the information below, compute the gain or loss component of net periodic
pension cost and indicate whether the amount is added or deducted in determining
pension cost for the period.
Actual return on plan assets............................................................. $450,000
Expected return on plan assets....................................................... 570,000
Unrecognized gain from prior years................................................. 240,000
Corridor amount ............................................................................... 150,000
Average service life for amortization purposes................................ 8

Solution 10
LO4
Deferred loss for current year ($450,000 - $570,000)............................. $120,000
Amortization of unrecognized gain from prior years
[($240,000 - $150,000)/8 years]......................................................... 11,250
Gain or loss component................................................................... $131,250

Both the deferred loss ($120,000) and the gain amortization ($11,250) have the
effect of reducing pension cost. Thus these amounts are combined and deducted
(offset against other components) in computing pension cost for the current period.

Problem 11
Based on the following data, determine the net periodic pension cost.
Service cost................................................................ $900,000
Amortization of prior service cost............................... 120,000
Funding of prior service cost...................................... 180,000
Expected return on plan assets.................................. 400,000
Excess of actual return over expected return............ 30,000
Amortization of deferred loss from prior years........... 20,000
Amortization of transition gain.................................... 44,000
Interest cost................................................................ 360,000

Solution 11
LO4
Service cost................................................................ $900,000
Interest cost................................................................ 360,000
Actual return on plan assets ($400,000 + $30,000)..........
(430,000)
Amortization of prior service cost............................... 120,000
Gain or loss:
Deferred gain for current year............................ $30,000
Amortization of deferred loss............................. 20,000 50,000
Amortization of transition gain....................................
(44,000)
Net periodic pension cost........................................... $956,000
Problem 12
The following balances relate to the defined benefit pension plan of Todd
Industries.

Dec. 31, 2002 Dec. 31, 2003

Fair value of plan assets.................................. $414,000 $517,500
Market-related value of plan assets................ 370,800 471,000
Projected benefit obligation............................. 487,500 611,400
Accumulated benefit obligation....................... 442,500 555,000
Prepaid/(accrued) pension cost....................... (18,300) 11,100
Unrecognized prior service cost...................... 34,500 27,900

(1) Determine the minimum pension liability, if any, at December 31, 2002 and
December 31, 2003.
(2) Prepare journal entries for the minimum liability adjustment, if any, at
December 31, 2002, and December 31, 2003. Assume that the company had
no previously recognized additional pension liability under FASB Statement No.
87.

Solution 12
LO4
(1) Minimum Liability Computations:
(ABO - Fair Value = Minimum pension liability)
Dec. 31, 2002: $442,500 - $414,000 = $28,500
Dec. 31, 2003: $555,000 - $517,500 = $37,500

(2) Minimum Liability Adjustment:

2002 Deferred Pension Cost ($28,500 - $18,300)............... 10,200
Additional Pension Liability.............................. 10,200

2003 Deferred Pension Cost.......................................... 17,700

Excess of Additional Pension Liability Over
Unrecognized Prior Service Cost.................... 20,700
Additional Pension Liability.............................. 38,400

Computations:
Minimum liability, Dec. 31, 2003...................... $37,500
Prepaid pension cost....................................... 11,100
Additional liability, Dec. 31, 2003.......................... $48,600
Balance before adjustment................................... 10,200
Adjustment (credit) to additional liability............... $38,400
 Maximum deferred pension cost, Dec. 31, 2003.. $27,900
Balance before adjustment................................... 10,200
Adjustment (debit) to deferred pension cost......... $17,700

Credit to additional liability.................................... $38,400

Debit to deferred pension cost.............................. 17,700
Debit to contra equity account.............................. $20,700

Problem 13
The following information relates to the defined benefit pension plan of Orchard
Company as of December 31, 2002:
Unamortized transition gain........................................................ $ 123,000
Unrecognized net loss from prior years...................................... 43,000
Market-related value of pension plan assets.............................. 2,343,000
Accumulated benefit obligation................................................... 2,500,000
Unrecognized prior service cost................................................. 400,000
Fair value of pension plan assets............................................... 2,557,000
Projected benefit obligation........................................................ 2,800,000

What amount should be shown on Orchard’s December 31, 2002 balance sheet as
“Prepaid/Accrued Pension Cost?” Clearly indicate whether the amount should be
shown as a liability or an asset.

Solution 13
LO4
Projected benefit obligation........................................................ $
(2,800,000)
Fair value of pension plan assets............................................... 2,557,000
Excess of obligation over funding (underfunding)...................... $
(243,000)
Unamortized transition gain........................................................
(123,000)
Unrecognized net loss from prior years...................................... 43,000
Unrecognized prior service cost................................................. 400,000
Prepaid pension cost (an asset)................................................. $ 77,000

Problem 14
Summary information for the nonpension postretirement benefit plan of Blossom
Company as of January 1, 2002 is given below:
Market-related value of plan assets........................................... $ 30,000
Accumulated postretirement benefit obligation.......................... 1,200,000
Fair value of plan assets............................................................. 65,000
Unamortized transition loss........................................................ 1,135,000
Amortization period for transition loss........................................ 20 years
 The following information relates to 2002:
Service cost................................................................................. $98,000
Actual return on plan assets....................................................... 12,000
Contributions to plan................................................................... 75,000
Benefits paid on behalf of retirees.............................................. 7,000
Assumed discount rate............................................................... 12%
Long-term expected rate of return on plan assets..................... 9%

(1) Prepare the journal entry to record net postretirement benefit cost and benefit
plan funding for 2002. Except for the transition loss, there were no deferred
gains or losses as of January 1, 2002.
(2) Prepare a reconciliation between the beginning and ending balances for the
accumulated postretirement benefit obligation as part the required disclosures
under GAAP.
(3) Compute the amount of “prepaid/accrued postretirement benefit cost” that
should be shown on the balance sheet as of December 31, 2002. Clearly
indicate whether the amount is an asset or a liability. There was no prepaid or
accrued amount as of January 1, 2002.

Solution 14
LO5, LO7
(1) Postretirement Benefit Cost............................................. 296,050
Prepaid/Accrued Postretirement Benefit Cost........ 221,050
Cash......................................................................... 75,000

Service cost................................................................................. $ 98,000

Interest cost ($1,200,000 x 0.12)....................................................... 144,000
Actual return on plan assets.......................................................
(12,000)
Deferral of excess return on plan assets (($30,000 x .09) - $12,000). 9,300
Amortization of transition loss ($1,135,000/20)............................... 56,750
Net postretirement benefit cost................................................... $296,050

(2) Accumulated postretirement benefit obligation--beginning........ $

(1,200,000)
Service cost.................................................................................
(98,000)
Interest cost................................................................................
(144,000)
Benefits paid to retirees.............................................................. 7,000
Accumulated postretirement benefit obligation--ending............. $
(1,435,000)
 (3) Prepaid/accrued postretirement benefit cost:
($1,200,000 + $98,000 + $144,000 - $7,000)........................................................
$(1,435,000)
Fair value of plan assets: ($65,000 + $12,000 + $75,000 - $7,000)......... 145,000
Excess of obligation over assets (underfunding)....................... $(1,290,000)
Unamortized transition loss: ($1,135,000 - $56,750)........................ 1,078,250
Unrecognized gain......................................................................
(9,300)
Accrued postretirement benefit cost (a liability)......................... $ (221,050)

Problem 15
Summary information for the non-pension postretirement benefit plan of Benson
Company as of January 1, 2002 is given below:
Market-related value of plan assets........................................... $ 40,000
Accumulated postretirement benefit obligation.......................... 1,250,000
Fair value of plan assets............................................................. 70,000
Unamortized transition loss........................................................ 1,180,000
Amortization period for transition loss........................................ 20 years

The following information relates to 2002:

Service cost................................................................................. $100,000
Actual return on plan assets....................................................... 15,000
Contributions to plan................................................................... 80,000
Benefits paid on behalf of retirees.............................................. 10,000
Assumed discount rate............................................................... 10%
Long-term expected rate of return on plan assets..................... 8%

(1) Prepare the journal entry to record net postretirement benefit cost and benefit
plan funding for 2002. Except for the transition loss, there were no deferred
gains or losses as of January 1, 2002.
(2) Prepare a reconciliation between the beginning and ending balances for the
accumulated postretirement benefit obligation as part the required disclosures
under GAAP.
(3) Compute the amount of “prepaid/accrued postretirement benefit cost” that
should be shown on the balance sheet as of December 31, 2002. Clearly
indicate whether the amount is an asset or a liability. There was no prepaid or
accrued amount as of January 1, 2002.
Test Bank, Intermediate Accounting, 14th ed. 161

Solution 15
LO5, LO7
(1) Postretirement Benefit Cost............................................. 280,800
Prepaid/Accrued Postretirement Benefit Cost........ 200,800
Cash......................................................................... 80,000

Service cost.........………………………………………………….. $100,000

Interest cost ($1,250,000 x 0.10)..........………………………………. 125,000
Actual return on plan assets.........………………………………..
(15,000)
Deferral of excess return on plan assets (($40,000 x .08) - $15,000). 11,800
Amortization of transition loss ($1,180,000/20)……………… 59,000
Net postretirement benefit cost……………………………. $280,800

(2) Accumulated postretirement benefit obligation—beginning

$(1,250,000)
Service cost……………………………………………………
(100,000)
Interest cost……………………………………………………
(125,000)
Benefits paid to retirees…………………………………….. 10,000
Accumulated postretirement benefit obligation—ending….
$(1,465,000)

(3) Prepaid/accrued postretirement benefit cost:

($1,250,000 + $100,000 + $125,000 - 10,000)…………………………….
$(1,465,000)
Fair value of plan assets: ($70,000 + $15,000 + $80,000 - $10,000) 155,000
Excess of obligation over assets (underfunding)………… $(1,310,000)
Unamortized transition loss: ($1,180,000 - $59,000)…………… 1,121,000
Unrecognized gain…………………………………………..
(11,800)
Accrued postretirement benefit cost (a liability)…………. $ (200,800)

Problem 16
Thomas, Inc., provides a noncontributory defined benefit plan for its 200
employees. Information from the company’s pension footnote for the year ended
December 31, 2001, and partial information for the year ended December 31,
2002, are given below:

12/31/01 12/31/02
Fair value of plan assets…………………. $ 1,347,500 $ 1,225,000
Projected benefit obligation……………… (1,587,500) (1,475,000)
Unrecognized prior service cost………… 113,095
Unrecognized loss………………………… 163,750
162 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

Prepaid pension cost…………………….. 36,845

Additional pension liability……………….. (64,345)
Prepaid/(accrued) pension cost…………. (27,500)

The company’s actuary indicated that the settlement rate and expected rate of
return on plan assets were both 8% for 2001 and 2002. The company contributed
$221,250 to the plan at the end of 2002. Service cost for 2002 was $125,000. The
actuary also disclosed that the accumulated benefit obligation was $1,375,000 on
December 31, 2001, and $1,200,000 on December 31, 2002.

On January 1, 2001, the company amended its plan to grant retroactive credit for
prior service rendered by employees prior to the amendment. This amendment
increased unrecognized prior service cost by $125,000 at that date. The prior
service cost is being amortized over the average remaining service life of the
employees affected by the amendment. The average remaining service life of the
workforce in each year has been constant at 10.5 years.

(1) Prepare a schedule computing pension cost for 2002.

(2) Prepare the journal entries to record pension expense and the pension
contribution, and to recognize the correct minimum liability, if any.
(3) Prepare the reconciliation between the beginning and ending balances of the
projected benefit obligation as required by GAAP for the disclosures related to
pension plans.

Solution 16
LO4, LO5
(1) Service cost.................................................................................$ 125,000
Interest cost ($1,587,500 x .08)......................................................... 127,000
Actual loss on plan assets ($1,347,500 + $221,250 - $1,225,000).......... 343,750
Deferral of loss on plan assets [$343,750 + ($1,347,500 x .08)]........... (451,550)
Amortization of prior service cost ($125,000 ÷ 10.5)......................... 11,905
Recognition of deferred loss [(($163,750 - ($1,587,500 x .1))) ÷ 10.5]..... 476
Total pension expense................................................................$ 156,581

(2) Pension Expense............................................................. 156,581

Prepaid/Accrued Pension Cost........................................ 64,669
Cash......................................................................... 221,250

Additional Pension Liability.............................................. 64,345

Deferred Pension Cost............................................ 64,345

Computation:
Accumulated benefit obligation at Dec. 31, 2002............………1,200,000
Fair value of plan assets at Dec. 31, 2002......................………1,225,000
Test Bank, Intermediate Accounting, 14th ed. 163

Since the fair value of plan assets at 12/31/02 exceeds the ABO at that date,
no minimum liability is needed and the account should be reduced to zero.
(3) Projected benefit obligation at Dec. 31, 2001............................$1,587,500
Service cost................................................................................. 125,000
Interest cost................................................................................ 127,000
Benefits paid ($1,587,500 + $125,000 + $127,000 - $1225,000).................. (364,500)
Projected benefit obligation at Dec. 31, 2002............................$1,475,000

Problem 17
The projected benefit obligation is the actuarial present value of the benefits
attributed to employee service rendered to date. The projected benefit obligation is
based on the present value of vested and nonvested benefits accrued to date using
employees’ future salary levels.

Identify arguments that can be advanced for and against the use of the projected
benefit obligation concept in accounting for pensions.

Solution 17
LO3
Opponents of the projected benefit obligation concept argue that based upon the
definition of a liability, pension benefits dependent on future increases in
compensation cannot be a present obligation. The liability measurement,
therefore, should be based only on actual compensation experience to date. The
opponents also note that if the pension plan were terminated or if an employee with
vested benefits did not render future services, the employer’s obligation would be
limited to amounts based on compensation to date.

Proponents of the projected benefit obligation concept argue that estimated future
compensation levels should be considered if a pension plan’s formula incorporates
them. These proponents argue that a promise to pay benefits based on a
percentage of the employee’s future salary is far different from a promise to pay a
percentage of the employee’s current salary. The projected benefit obligation is an
estimate of a present obligation to make future cash payments as a result of past
events. The going-concern assumption supports the use of future compensation
levels in calculating the projected benefit obligation.

Problem 18
Employers use a discount rate to compute the actuarial present value of benefits,
pension expense, and the obligation of the employer under the pension plan. The
choice of the discount rate can have a great effect on measures of pension cost
and benefit obligations. Assumptions regarding discount rates must be made
carefully in order to ensure that differences in pension plans are properly reflected
in the annual reports of companies sponsoring such plans.
164 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

Identify factors employers should consider when choosing the discount rate to be
used in accounting for pension plans of the enterprise.

Solution 18
LO3
Assumed discount rates are used in measurements of the projected, accumulated
and vested benefit obligations and the service and interest cost components of net
periodic pension cost. The assumed discount rate should reflect the rate at which
pension obligations could be settled if sufficient funds were invested at that rate.
Actuarial present value considers not only the time value of money, but also factors
that affect the probability of payment, such as life expectancy, turnover, and
disability. An estimate of the discount rate should include consideration of the rates
implicit in the current prices of annuity contracts that could be used to effect
settlement of the obligation. Information on available annuity rates currently
published by the Pension Benefit Guaranty Corporation represents one source of
rates on annuity contracts. Employers also should look at rates of return on high-
quality fixed-income investments currently available and expected to be available
during the period to maturity of the pension benefits. Consideration also should be
given to the average age of employees. The discount rate for a plan covering
mainly retirees might reflect a portfolio of investments with shorter maturities than
those of a plan covering a younger workforce. In this regard, it should be noted
that a relatively small change in the discount rate can have a rather dramatic effect
on pension liabilities.

Problem 19
The areas of pension plans and other post retirement benefits (such as health care
benefits) appear on the surface to be quite similar. Nonetheless, the Financial
Accounting Standards Board issued its pronouncement on other postretirement
benefits some five years after the issuance of the pronouncement on pensions.

Explain why the FASB did not consider the areas of pensions and other post
retirement benefits concurrently.
Test Bank, Intermediate Accounting, 14th ed. 165

Solution 19
LO3, LO7
FASB did not consider pensions and other postretirement benefits concurrently due
to the differing nature of the two obligations. Pension plans typically are funded
while health care benefits are not. The benefits provided under pension plans
typically are quite clearly defined whereas benefits for health care and other
postretirement benefits are not. Indeed, many postretirement plans do not limit
health care benefits and provide coverage regardless of the seriousness or length
of an illness. The beneficiaries under a pension plan usually are limited to the
retiree and his or her surviving spouse. Benefits for other postretirement benefits
include the retiree, his or her spouse, and other dependents. Predicting the
amount and timing of benefits paid under a pension plan is somewhat easier since
benefits typically are paid monthly and tend to be well defined and somewhat fixed.
Other postretirement benefits must be paid as required and may be highly
unpredictable both as to timing and amount. The level of utilization of health care
benefits is dependent on such things as life span, changes in technology, changes
in the body of medical knowledge, and the incidence of previously unknown
diseases. Each of these factors also may affect the price of health care.
Furthermore, the price of health services may vary according to the geographic
location of the recipients.
CHAPTER 17 -- QUIZ A
Name _________________________
Section ________________________

T F 1. The employer and employee share equally the cost of FICA tax and federal
and state unemployment tax.

T F 2. Compensated absences include payments by employers for vacation,

holiday, illness, or other personal activities.

T F 3. FASB Statement No. 43 requires a liability to be recognized for compensated

absences that have been earned through services rendered, that are vested
or carried forward to subsequent years, and that are estimable and probable.

T F 4. FASB Statement No. 43 requires sick pay to be accrued only if it vests with
the employee.

T F 5. Defined benefit pension plans provide for an increase in future retirement

benefits as additional services are rendered by an employee.

T F 6. The projected benefit approach is used to determine the amount of future

benefits earned by employees when benefits are nonpay related.

T F 7. A debit balance in the prepaid/accrued pension cost account indicates that

current-period contributions were less than the net periodic pension cost for
the current period.

T F 8. The projected benefit obligation is a present value measure of the future

benefits expected to be paid to employees based on their employment to
date, but also taking into consideration, if applicable, expected increases in
wages that would affect their retirement benefits.

T F 9. The market-related asset value is based only on the market value of plan
assets at a given measurement date.

T F 10. The gain or loss component of net periodic pension cost arises from
differences between expected results and actual experience.

166
CHAPTER 17 -- QUIZ B
Name _________________________
Section ________________________

T F 1. The FASB established the concept of a corridor amount to lessen the impact
of amortizing prior service cost.

T F 2. A transition gain or loss is usually recognized periodically by amortization on

a straight-line basis over the average remaining service life of the
participating employees.

T F 3. The projected benefit obligation is used in computing the minimum pension

liability.

T F 4. FASB Statement No. 87 requires that the employer report a net pension
minimum liability that is at least equal to the unfunded accumulated benefit
obligation.

T F 5. If an additional liability is recorded as a result of the minimum liability

requirements, the offsetting charge is always to an intangible asset account.

T F 6. When a pension plan is overfunded, the difference between the value of

pension fund assets and the projected benefit obligation is reported on the
balance sheet as an asset.

T F 7. A settlement of a pension plan occurs when an employer takes an

irrevocable action that relieves the employer of primary responsibility for all or
part of the pension plan obligation.

T F 8. Health care benefits are the primary focus of FASB Statement No. 106,
“Employers’ Accounting for Postretirement Benefits Other than Pensions.”

T F 9. Unlike pension plans, most other postemployment benefit plans are nonpay
related.

T F 10. The minimum liability disclosure rules for other postretirement benefit plans
are similar to those for pension plans.

167
CHAPTER 17 -- QUIZ C
Name _________________________
Section ________________________

A. Postretirement benefits L. Projected benefit obligation

B. Accumulated benefit obligation M. Market-related asset value
C. Accrued pension cost N. Corridor amount
D. Net periodic pension cost O. Transition amount
E. Accumulated postretirement P. Single employer plan
benefit obligation Q. Curtailment
F. Vested benefits R. Settlement
G. Contributory plan S Service cost
H. Multi-employer plan T. Defined benefit pension plan
I. Interest cost U. Fair value of plan assets
J. Noncontributory pension plan V. Defined contribution pension plan
K. Prior service cost W. Minimum pension liability

Select the term that best fits each of the following definitions and descriptions. Indicate
your answer by placing the appropriate letter in the space provided.

____1. The actuarial present value of pension benefits based on the plan formula for employee service
earned to date using the existing salary structure.
____2. An event that significantly reduces the expected years of future services of present employees
or
eliminates for a significant number of employees the accrual of defined benefits for their future
services.
____3. A method for valuing plan assets that generally reflects average values over five years.
____4. A pension plan in which the employer bears the total cost of the plan.
____5. Cost of credit given to employees for service rendered before the initiation or amendment of a
pension plan.
____6. The amount of pension benefits an employee will retain if employment with the employer is
terminated.
____7. The net amount of pension liability that must be reported when a plan is underfunded.
____8. The cost to the employer of the additional future benefits earned by employees during a period.
____9. A type of pension plan that is funded by contributions from more than one employer.
____10. The amount that could be received from the sale of plan assets in a current sale between a
willing
buyer and seller.
____11. Difference between the fair value of plan assets and the projected benefit obligation at the time
FASB Statement No. 87 is adopted by an employer.
____12. In the past, companies often charged these costs to accounts on a pay-as-you-go basis.
____13. The projected benefit obligation at the beginning of the period multiplied by the settlement rate.
____14. The present value of expected future benefits based on assumptions that include estimated
future
salary levels.
____15. The annual expense recognized by the employer as a result of its pension plan.
____16. The cumulative excess of annual pension costs over annual pension contributions.
____17. Under this type of pension plan, the investment risk is borne by the employer.
____18. An amount established as a minimum before amortization of pension gains and losses is
required.
____19. These types of plans are not considered in FASB Statement No. 87 except for disclosure
requirements.

168
____20. An irrevocable action that relieves an employer of primary responsibility for all or part of its
pension
obligation.

169
170 Chapter 17  Employee Compensation—Payroll, Pensions, and Other Compensation Issues

CHAPTER 17 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C

1. F 1. F 1. B
2. T 2. T 2. Q
3. T 3. F 3. M
4. T 4. T 4. J
5. T 5. F 5. K
6. F 6. F 6. F
7. F 7. T 7. W
8. T 8. T 8. S
9. F 9. T 9. H
10. T 10. F 10. U
11. O
12. A
13. I
14. L
15. D
16. C
17. T
18. N
19. V
20. R
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