Visor Co. maintains a defined benefit pension plan for its employees. The service cost
component of Visor pension expense is measured using the
Detailed Answer
Answer (C) is correct.
Service cost is the actuarial present value of benefits attributed by the
pension benefit formula to services rendered during the accounting
period. It is a component of the projected benefit obligation (PBO). The
PBO as of a date is equal to the actuarial present value of all benefits
attributed by the pension benefit formula to employee service rendered
prior to that date. The PBO is measured using assumptions as to future
salary levels.
2
Visor Co. maintains a defined benefit pension plan for its employees. The service cost
component of Visor pension expense is measured using the
Detailed Answer
Answer (C) is correct.
Service cost is the actuarial present value of benefits attributed by the
pension benefit formula to services rendered during the accounting
period. It is a component of the projected benefit obligation (PBO). The
PBO as of a date is equal to the actuarial present value of all benefits
attributed by the pension benefit formula to employee service rendered
prior to that date. The PBO is measured using assumptions as to future
salary levels.
3
Which of the following components must be included in the calculation of pension expense
recognized for a period by an employer sponsoring a defined benefit pension plan?
Interest Cost.....Expected Return on Plan Assets
Detailed Answer
Answer (B) is correct.
The required minimum pension expense consists of the following
elements:
+ Service cost
+ Interest cost
– Expected return on plan assets
± Amortization of net gain or loss
± Amortization of prior service cost of credit
=Pension expense
Thus, both interest cost and expected return on plan assets are
components of pension expense.
4
The following information pertains to Gali Co. defined benefit pension plan for Year 1:
Fair value of plan assets, beginning of year
$350,000
Fair value of plan assets, end of year
525,000
Employer contributions
110,000
Benefits paid
85000
"In computing pension expense, what amount should Gali use as actual return on plan
assets?"
Detailed Answer
Answer (B) is correct. The actual return on plan assets is based on the fair value of plan assets at the beginning and end of the accounting period adjusted for contributions and payments during the period. The actual return for Gali is $150,000 ($525,000 � $350,000 � $110,000 + $85,000).
5
Interest cost included in the pension expense recognized for a period by an employer sponsoring a defined benefit pension plan represents the
Detailed Answer
Answer (B) is correct. The interest cost component of pension expense is defined as the increase in the PBO resulting from the passage of time.
6
Fact Pattern:
Selected financial information for Jory Company for the current year ended December 31 is shown below.
Plan assets at January 1
$6,000,000
Projected benefit obligation at January 1
5,000,000
Accumulated benefit obligation at January 1
4,000,000
Interest cost
400,000
Service cost
700,000
Actual return on plan assets
500,000
Expected return on plan assets
500,000
Employer’s contribution
800,000
Benefits paid to retirees
300,000
Accrued pension cost at January 1
-0-
Jory’s net pension expense for the year ended December 31 is
Detailed Answer
Answer (A) is correct.
Jory’s net pension expense for the year ended December 31 can be
calculated as follows:
Current service cost $700,000
Interest cost 400,000
Expected return on plan assets (500,000)
Net periodic pension cost $600,000
7
Fact Pattern:
Selected financial information for Jory Company for the current year ended December 31 is shown below.
Plan assets at January 1
$6,000,000
Projected benefit obligation at January 1
5,000,000
Accumulated benefit obligation at January 1
4,000,000
Interest cost
400,000
Service cost
700,000
Actual return on plan assets
500,000
Expected return on plan assets
500,000
Employer’s contribution
800,000
Benefits paid to retirees
300,000
Accrued pension cost at January 1
-0-
The plan assets at December 31 for Jory should be valued at
Detailed Answer
Answer (C) is correct. The fair value of Jory’s plan assets at December 31 can be calculated as follows:
Fair value, January 1 $6,000,000
Add: Actual return 500,000
Add: Employer contribution 800,000
Less: Retirement benefits paid (300,000)
Fair value, December 31 $7,000,000
8
Fact Pattern:
Selected financial information for Jory Company for the current year ended December 31 is shown below.
Plan assets at January 1
$6,000,000
Projected benefit obligation at January 1
5,000,000
Accumulated benefit obligation at January 1
4,000,000
Interest cost
400,000
Service cost
700,000
Actual return on plan assets
500,000
Expected return on plan assets
500,000
Employer’s contribution
800,000
Benefits paid to retirees
300,000
Accrued pension cost at January 1
-0-
Jory’s projected benefit obligation at December 31 is
Detailed Answer
Answer (C) is correct.
Jory’s projected benefit obligation at December 31 can be calculated as
follows:
PBO, January 1 $5,000,000
Add: Current service cost 700,000
Add: Interest cost 400,000
Less: Retirement benefits paid (300,000)
PBO, December 31 $5,800,000
9
Fact Pattern:
"Brown Industries operates a defined benefit pension plan. Information received from the
actuary and the trustee related to the Year 2 pension plan includes the following:"
Projected benefit obligation, January 1, Year 2
$1,889,000
Service cost
105,000
Interest cost
190,000
Retirement benefits paid
182,000
Employer contribution
155,000
Actual return on plan assets
215,000
Amortization of prior service cost
122,000
Amortization of prior-year net pension loss
37,000
Fair value -- pension plan assets, December 31, Year 1
1,825,000
Brown’s Year 2 net pension cost is
Detailed Answer
Answer (B) is correct.
Assuming that the actual return on plan assets is equal to the expected
return, the calculations are:
Current service cost $105,000
Interest cost 190,000
Actual return on plan assets (215,000)
Amortization of prior service cost 122,000
Amortization of prior-year net pension loss 37,000
Net periodic pension cost $239,000
10
Fact Pattern:
"Brown Industries operates a defined benefit pension plan. Information received from the
actuary and the trustee related to the Year 2 pension plan includes the following:"
Projected benefit obligation, January 1, Year 2
$1,889,000
Service cost
105,000
Interest cost
190,000
Retirement benefits paid
182,000
Employer contribution
155,000
Actual return on plan assets
215,000
Amortization of prior service cost
122,000
Amortization of prior-year net pension loss
37,000
Fair value -- pension plan assets, December 31, Year 1
1,825,000
The fair value of Brown’s plan assets at December 31, Year 2, is
Detailed Answer
Answer (D) is correct.
The calculations are:
Fair value, Dec. 31, Year 1 $1,825,000
Add: Actual return 215,000
Add: Employer contribution 155,000
Less: Retirement benefits paid (182,000)
Fair value, Dec. 31, Year 2 $2,013,000
