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Exam 17: Pensions and Other Postretirement Benefits

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Question 71

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Pension data for Sewell Corporation include the following for the current calendar year: Discount rate, 8% Expected return on plan assets, 10% Actual return on plan assets, 12% Required: Assuming cash contributions were made at the end of the year, what was the amount of those contributions? $\begin{array}{lr}\text { PBO, January 1 } & \$ 620,000,000 \\\text { Plan assets, January 1 } & 630,000,000 \\\text { Plan assets, December 31 } & 670,000,000 \\\text { Benefit payments to retirees, December 31 } & 55,000,000\end{array}$

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Cash contributions =...

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Question 72

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Which of the following is not a requirement for a qualified pension plan?

A) It cannot discriminate in favor of highly paid employees.
B) It must cover at least 80% of the employees.
C) It must be funded in advance of retirement.
D) Benefits must vest after a specified period of service, commonly five years.

E) B) and D)
F) B) and C)

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Question 73

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Silver Springs Company has an unfunded retiree health care plan. Each of the company's four employees has been with the organization since its inception at the beginning of 2008. As of the end of 2009, the actuary estimates the total net cost of providing benefits to employees during their retirement years to have a present value of $196,000. Each of the employees will become fully eligible for benefits after 28 more years of service, but aren't expected to retire for 30 more years. The interest rate is 8%. Required: 1) What is the expected postretirement benefit obligation at the end of 2009? 2) What is the accumulated postretirement benefit obligation at the end of 2009?

What is different about the expected postretirement benefit obligation and the accumulated postretirement benefit obligation?

Lender Company provides postretirement health care benefits to employees who provide at least 10 years of service and reach the age of 65 while in service. On January 1 of the current calendar year, the following plan-related data were available. On January 1 of the current year, Lender amends the plan to provide dental benefits. The actuary determines that the cost of making the amendment increases the APBO by $20,000,000. Management chooses to amortize this amount on a straight-line basis. The service cost is $40,000,000. The appropriate interest rate is 10%. Required: Calculate the postretirement benefit expense for the current year. $\begin{array} { l l } \text { APBO balance } & \$ 150,000,000 \\\text { Fair value of plan assets } & \text { none } \\\text { Average remaining service period to retirement } & 25 \text { years } \\\text { Average remaining service period to full eligibility } & 20 \text { years }\end{array}$

Louie Company has a defined benefit pension plan. On December 31 (the end of the fiscal year) , the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $8,000. The discount rate applied by the actuary was 8%. What was the service cost for the year?

What was the PBO at the beginning of the year?

Discuss income smoothing as the term relates to pension plans.

The three components of pension expense that are present most often are:

A gain from changing an estimate regarding the obligation for pension plans will:

Differentiate between a defined contribution pension plan and a defined benefit pension plan.

In its 2009 annual report to shareholders, the Marianne James Companies Inc. (MJCI) disclosed the following information, regarding its postemployment benefit plans. The Company and certain of its affiliates sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2009, 2008 and 2007: The company instituted workforce reduction programs in its North American food operations in 2007. These actions resulted in incremental postemployment costs, which are shown as other expense above. Required: Describe the three components in the net postemployment costs disclosed by MJCI. (in millions) $\begin{array}{lrrr} & \mathbf{2 0 0 9} & \mathbf{2 0 0 8} & \mathbf{2 0 0 7} \\\text { Service cost } & \$ 34 & \$ 26 & \$ 24 \\\text { Amortization of net loss } & 8 & 6 & 2 \\\text { Other expense } & -- & -- & 161 \\\text { Net postemployment costs }&\$42&\$32&\$187\end{array}$

Mars Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year) , the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The discount rate applied by the actuary was 8%. What was the beginning PBO?

Rodeo Corporation amended its defined benefit pension plan on January 31, 2009, to increase retirement benefits earned with each service year. The actuary estimated the prior service cost to be $216,000. Rodeo's 80 present employees are expected to retire at the rate of about 10 each year at the end of each of the next 8 years beginning on December 31, 2009. Required: Using the service method, calculate the amount of prior service cost to be amortized to pension expense in each of the next 8 years.

Data pertaining to the postretirement health care benefit plan of Danielson Delivery Service include the following for the current calendar year. Required: 1) Determine Danielson's postretirement benefit expense for the current year. 2) Prepare the journal entries to record the benefit expense and funding for the current year. $\begin{array} { l r } \text { Service cost } & \$ 150,000 \\\text { APBO, January 1 } & \$ 800,000 \\\text { Plan assets (fair value), January 1 } & \$ 80,000 \\\text { Prior service cost (current year amortization, } & \\\$ 2,000 \text { ) } & \$ 90,000 \\\text { Retiree benefits paid (end of year) } & \$ 90,000 \\\text { Net gain (current year amortization, } \$ 1,000 ) & \$ 92,000 \\\text { Contribution to health care fund (end of year) } & \$ 85,000 \\\text { Return on plan assets (actual and expected) } & 10 \% \\\text { Discount rate } & 8 \%\end{array}$

The attribution approach required by SFAS 106 for postretirement health care plans is to assign:

The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of:

Pension gains related to plan assets occur when:

Which one of the following assumptions is needed to estimate both postretirement health care benefits and pension benefits?

A company's defined benefit pension plan had a PBO of $265,000 on January 1, 2009. During 2009, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2009 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2009, was: