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Chapter 1 - 4 Current Liabilities, Notes Payable, Bonds Payable, Provision, Contingent Liabilities and Contingent Assets NAME: Date: Instructor: Section: Score: Quiz 1
- A retail store sells gift certificates that are redeemable in merchandise. What is the effect of a sale of gift certificate on the following? Revenue Liability a. No effect No effect b. Increase Increase c. No effect Increase d. Increase No effect
- According to the revised Conceptual Framework , a liability is recognized if a. the liability exists by meeting all the aspects in the definition of a liability. b. recognizing the liability results in relevant and faithfully represented information. c. the outflow of economic benefits from the obligation is both probable and can be measured reliably. d. a and b
- Which of the following instruments would not be classified as a financial liability? a. A preference share that will be redeemed by the issuer for cash on a future date (i.e., the entity has an outstanding share that it will repurchase at a future date). b. A contract for the delivery of as many of the entity’s ordinary shares as are equal in value to ₱100,000 on a future date (i.e., the entity will issue a variable number of own shares in return for cash at a future date). c. An issued perpetual debt instrument (i.e., a debt instrument for which interest will be paid for all eternity, but the principal will not be repaid). d. A written call option that gives the holder the right to purchase a fixed number of the entity’s ordinary shares in return for a fixed price (i.e., the entity would issue a fixed number of own shares in return for cash, if the option is exercised by the holder, at a future date).
- The following are taken from the records of MOLLIFY APPEASE Co. as of year-end. Accounts payable 8,000 SSS contributions payable 24, Utilities payable 28,000 Cash dividends payable 16, Accrued interest expense 24,000 Property dividends payable 28, Advances from customers 4,000 Share dividends payable 12, Unearned rent 36,000 Lease liability 140, Warranty obligations 20,000 Bonds payable 480, Unearned interest on receivables 12,000 Discount on bonds payable (60,000) Income taxes payable 8,000 Security deposit 8, Obligation to deliver a variable number of own shares worth a fixed amount of cash
Redeemable preferences shares issued 56, Preference shares issued 40,000 Constructive obligation 44, How much are the total financial liabilities to be disclosed in the notes? a. 784,000 b. 800,000 c. 740,000 d. 700,
- ENVISAGE THINK VISUALIZE Co. has a 10%, ₱2,000,000 loan payable as of December 31, 20x1 which is maturing on July 1, 20x2. Interest on the loan is due every July 1 and December 31. All interests accruing during year were settled on the scheduled dates. On December 1, 20x1, ENVISAGE Co. entered into a refinancing agreement with the lender to roll over the loan for another six- year term. The rollover transaction was completed in December 20x1. In ENVISAGE’s 20x1 annual financial statements, how much is presented as current liability in relation to the loan? a. 2,000,000 b. 2,200,000 c. 240,000 d. 0
- Eliot Corporation’s liabilities at December 31, 2008 were as follows: Accounts payable and accrued interest 2,000, 5 - year 10% Notes payable – due December 31, 2011 5,000, Part of the loan agreement is for Elliot to appropriate a fixed amount out of its accumulated profits and losses annually until the amount of appropriation has equaled the face amount of the obligation. Non-compliance will render the note as payable on demand by the lender. As of December 31, 2008, Elliot Corporation has not yet complied with the loan agreement. However, on December 31,
2008, the lender provided Elliot a grace period of 12 months to rectify the breach and, within which, the lender will not demand payment. What amount of current liabilities should Elliot Corporation report in its December 31, 2008 statement of financial position? a. 2,000,000 b. 5,000,000 c. 7,000,000 d. 0
- NESCIENCE IGNORANCE Co. has the following liabilities as of December 31, 20x1. Trade accounts payable, net of debit balance in supplier’s account of ₱20,000, net of unreleased checks of ₱16,000, and net of postdated checks of ₱8,000. 1,200, Credit balance in customers’ accounts 8, Financial liability designated at FVPL 200, Bonds payable maturing in 10 equal annual installments of ₱400,000 4,000, 12%, 5-year note payable issued on October 1, 20x1 400, Deferred tax liability 20, Unearned rent 16, Contingent liability 40, Reserve for contingencies 100, How much are the total current liabilities? a. 1,880,000 b. 1,868,000 c. 1,872,000 d. 1,860,
- FLUNK TO FAIL Co. requires advance payments for custom-built guitar effects, gadgets, and racks. The records of FLUNK show the following: Unearned revenue, January 1, 20x1 ₱ 2,000, Advances received during 20x1 20,000, Advances applied to orders shipped in 20x1 16,000, Advances pertaining to orders cancelled in 20x1 600, How much is presented as current liability assuming the advance payments received are refundable? a. 4,500,000 b. 5,400,000 c. 6,000,0 00 d. 6,600,
- WOLFISH FEROCIOUS Co. maintains escrow accounts and pays real estate taxes for its customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Information on escrow accounts are shown below: Escrow accounts liability, January 1, 20x1 ₱ 800, Escrow payments received during 20x1 6,000, Real estate taxes paid during 20x1 2,000, Interest on escrow funds during 20x1 400, How much is the current liability for the escrow accounts on December 31, 20x1? a. 5,160,000 b. 4,800,000 c. 4,840,000 d. 5,040,
- SOOTHE RELIEVE Co.’s note payable with a carrying amount of ₱4,000,000 as of December 31, 20x is due for immediate repayment upon the demand of the lender. However, on December 31, 20x1, there is no indication that the lender will demand payment over the next 12 months. What amount of the note payable is reported as current liability in SOOTHE’s 20x1 year-end financial statements? a. 4,000,000 b. 200,000 c. 4,200,000 d. 0
- Which of the following represents a liability? a. The obligation to pay interest on a five-year note payable that was issued on the last day of the current year. b. The obligation to pay for goods that an entity expects to order from suppliers next year. c. The obligation to deliver goods that customers have ordered and paid for during the current year. d. The obligation to distribute own shares of stocks next year as a result of a dividend declaration near the end of the current year.
- On January 1, 20x1, Washy-washy Co. acquired a washing machine by paying cash of ₱400,000 and issuing a noninterest-bearing note of ₱4,000,000 due on January 1, 20x4. The effective interest rate on the note is 12%. How much is the interest expense in 20x1? a. 341,656 b. 389,654 c. 334,357 d. 480,
- On January 1, 20x1, Spin Co. acquired an intangible asset by paying cash of ₱400,000 and issuing a noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments. The first installment is due on January 1, 20x1, while the succeeding installments are due every December
- The effective interest rate is 12%. How much is the carrying amount of the note on December 31, 20x1? a. 2,401,832 c. 2,188,
a. amortized over the period remaining to maturity and reported as an extraordinary item in the income statement. b. amortized over the period remaining to maturity and reported as part of income from continuing operations in the income statement. c. reported in the income statement as an extraordinary item in the period of redemption. d. reported in the income statement as part of income from continuing operations in the period of redemption.
- On January 1, 20x1, SMUDGE BLUR Co. issued 1,000, ₱4,000, 12%, 3 - year bonds for ₱4,198,948. Principal is due on December 31, 20x3 but interests are due annually every year-end. The effective interest rate is 10%. How much is the unamortized discount or premium on bonds payable as of December 31, 20x1? a. 198,948 c. 138, b. 135,204 d. 143,
- On January 1, 20x1, SLOPPY UNTIDY Co. issued 10%, ₱4,000,000 bonds at face amount. SLOPPY paid underwriter’s commission of ₱192,147. The bonds mature on December 31, 20x3. Interest is due annually. The effective interest on the bond issue is approximately equal to a. 9.2659% c. 12% b. 11.3692% d. 13.5%
- On March 1, 2002, Pyne Furniture Co. issued ₱700,000 of 10 percent bonds to yield 8 percent. Interest is payable semiannually on February 28 and August 31. The bonds mature in ten years. Pyne Furniture Co. is a calendar-year corporation. How much is the issue price of the bonds? a. 792,335 c. 802, b. 795,132 d. 809,
- On January 1, 20x1, SPITEFUL MALICIOUS Co. issued 1,000, ₱4,000, 10%, 3-year bonds for ₱3,807,852. Principal is due on December 31, 20x3 but interests are due annually every year-end. The effective interest rate is 12%. SPITEFUL Co. incorrectly used the straight line method instead of the effective interest method to amortize the discount. What is the effect of the error on the carrying amount of the bonds on December 31, 20x1? (over) understated a. 7,107 c. 6, b. (7,107) d. (6,341)
- On April 1, 20x1, SQUALID FILTHY Co. issued 12%, ₱4,000,000 bonds dated January 1, 20x1 at 97 including accrued interest. The bonds mature in ten years and pay interest annually every year- end. How much is the initial carrying amount of the bonds? a. 3,760,000 c. 3,812, b. 3,880,000 d. 4,000,
- On January 1, 20x1, POTENT POWERFUL Co. issued 12% bonds with face amount of ₱4,000,000 for ₱4,303,264. The bonds mature in five years and pay annual interest every year-end. The effective interest rate is 10%. On July 1, 20x3, POTENT called-in the entire bonds and retired them at 102, which is inclusive of payment for accrued interest. How much is the gain (loss) on the extinguishment of the bonds? a. 328,897 c. (118,948) b. (328,896) d. 118,
- On January 1, 20x1, TIPSY UNSTEADY Co. issued 10%, ₱12,000,000 bonds for ₱11,601,220. Principal on the bonds matures in three equal annual installments. Interest is also due annually at each year-end. The effective interest rate on the bonds is 12%. How much is the carrying amount of the bonds on December 31, 20x1? a. 7,844,635 c. 7,683, b. 7,793,366 d. 7,543,
- On December 31, 20x1, CONFLAGRATION LARGE FIRE Co. agreed to the following modification of its existing liability: The principal remained unchanged at ₱20,000,000. The repayment of the accrued interest of ₱600,000 was waived. The maturity date was extended from December 31, 20x2 to December 31, 20x4. The stated rate was reduced from 12% to 10%. Interest is payable annually at each year-end. The original effective interest rate is 12%. CONFLAGRATION Co. incurred costs of ₱200,000 which were directly attributable to the restructuring. The costs were paid to third parties. How much is the gain (loss) on the extinguishment of the debt? a. (1,360,732) c. (200,000) b. 1,360,732 d. 0
- To record an asset retirement obligation (ARO), i.e., provision for decommissioning and restoration costs, the cost associated with the ARO is
a. expensed. b. included in the carrying amount of the related long-lived asset. c. included in a separate account. d. none of these.
- The board of directors of ABC Inc. decided on December 15, 20XX, to wind up international operations in the Far East and move them to Australia. The decision was based on a detailed formal plan of restructuring as required by PAS 37. This decision was conveyed to all workers and management personnel at the headquarters in Europe. The cost of restructuring the operations in the Far East as per this detailed plan was ₱ 2 million. How should ABC Inc. treat this restructuring in its financial statements for the year-end December 31, 20XX? a. Because ABC Inc. has not announced the restructuring to those affected by the decision and thus has not raised an expectation that ABC Inc. will actually carry out the restructuring (and as no constructive obligation has arisen), only disclose the restructuring decision and the cost of restructuring of ₱2 million in footnotes to the financial statements. b. Recognize a provision for restructuring since the board of directors has approved it and it has been announced in the headquarters of ABC Inc. in Europe. c. Mention the decision to restructure and the cost involved in the chairman’s statement in the annual report since it a decision of the board of directors. d. Because the restructuring has not commenced before year-end, based on prudence, wait until next year and do nothing in this year’s financial statements.
- In 20x1, LUMINOUS SHINING Co. recalled a product due to a possible defect caused by malfunctioning factory equipment. The products recalled will be repaired free of charge. LUMINOUS is uncertain whether all products recalled will have the possible defect. However, the following estimate was made by LUMINOUS’s engineers and managerial accountants and approved by the board of directors. Repair cost Probability 80,000,000 5% 60,000,000 20% 40,000,000 35% 20,000,000 40% 100% How much is the provision to be recognized? a. 38M c. 48M b. 50M d. 32M
- A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract of sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e., more likely than not) that there will be some claims under the warranties. Sales of ₱40 million were made evenly throughout 20X1. At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x outflows of economic benefits related to the warranty repairs and replacements take place on June 30, 20x2. Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or replacement costing 90% of sale price. The entity has no reason to believe future warranty claims will be different from its experience. At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30, 20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows. How much is the warranty provision at December 31, 20x1? a. 424,000 c. 800, b. 840,000 d. 752,
- SENTIENT AWARE Co. is engaged in logistics services. During the year, a warehouse was destroyed by fire. It was estimated that SENTIENT will probably pay around ₱200M in damages caused to the goods owned by customers that were contained in the destroyed warehouse. The contents of the warehouse are insured for ₱80M. SENTIENT’s claim for the insurance has been approved for payment by the insurance company. How much is the provision to be recognized? a. 200M c. 60M b. 120M d. 0
Solutions
1. C
2. D
3. D
4. C
Accounts payable 8,
Utilities payable 28,
Accrued interest expense 24,
Obligation to deliver a variable number of own shares worth a fixed amount of cash 40,
Cash dividends payable 16,
Lease liability 140,
Bonds payable 480,
Discount on bonds payable (60,000)
Security deposit 8,
Redeemable preference shares 56,
Total financial liabilities 740,
5. D – the loan is noncurrent as of December 31, 20x1 because it is due in six-years’ time
6. A
7. A
Solution:
a. Trade accounts payable gross of debit balance, unreleased check, and postdated check
(1.2M + 20K + 16K + 8K)
b. Advances from customers (Credit balance in customers’ accounts)
c. Financial liability designated at FVPL 200,
d. Current portion of bonds payable 400,
e. Interest payable on note payable (₱400,000 x 12% x 3/12) 12,
g. Unearned rent 16,
Total current liabilities 1,880,
8. C
Unearned income
2,000,000 Jan. 1, 20x
Advances earned 16,000,000 20,000,000 Advances received
Orders cancelled 600,
Dec. 31, 20x1 5,400,
Unearned income – Dec. 31, 20x1 5,400,
Refundable deposits 600,
Total current liability for advances received 6,000,
9. A
Liability for escrow accounts 800,000 Jan. 1, 20x 6,000,000 Escrow payments received Taxes paid 2,000,000 360, Interest on escrow funds net of 10% service fee (400,000 x 90%) Dec. 31, 20x1 5,160,
10. A ₱4,000,000, the note is payable on demand. Only if an enforceable promise is received by
the end of the reporting period from the creditor not to demand payment for at least 12
months after the reporting period that the note may be classified as noncurrent.
11. C
12. A
Initial measurement: (4,000,000 x PV of 1 @12%, n=3) = 2,847,
Interest expense in 20x1: 2,847,121 x 12% = 341,
13. D
Initial measurement: (1,000,000 x PV of an annuity due @12%, n=4) = 3,401,
Subsequent measurement:
Date Payments Interest expense Amortization Present value Jan. 1, 20x1 3,401, Jan. 1, 20x1 1,000,000 - 1,000,000 2,401, Dec. 31, 20x1 1,000,000 288,220 711,780 1,690,
14. D
Initial measurement:
(4,800,000 ÷ 6 semiannual payments) = 800,000 x PV of ordinary annuity @5%, n=6 = 4,060,
Subsequent measurement:
Date Payments Interest expense Amortization Present value Jan. 1, 20x1 4,060, July 1, 20x1 800,000 203,028 596,972 3,463, Dec. 31, 20x2 800,000 173,179 626,821 2,836,
15. D
Initial measurement:
Cash flows PV of 1 @10% PVF PV Dec. 31, 20x1 2,400,000 (^) n=1 0.909091 2,181, Dec. 31, 20x2 1,600,000 (^) n=2 0.826446 1,322, Dec. 31, 20x3 800,000 (^) n=3 0.751315 601, 4,105,
Subsequent measurement:
Date Payments Interest expense Amortization Present value Jan. 1, 20x1 4,105, Dec. 31, 20x1 2,400,000^ 410,518^ 1,989,482^ 2,115,
16. C
Initial measurement: 4,000,000 – the cash price equivalent
Trial and error approach
1 st^ trial: (at 6%)
Future cash flows x PV factor at x% = PV of note
4,800,000 X PV factor at 6%, n=3 = 4,000,
(4,800,000 x 0.839619) = 4,030,171 is not equal to 4,000,
2 nd^ trial: (at 7%)
Future cash flows x PV factor at x% = PV of note
4,800,000 X PV factor at 7%, n=3 = 4,000,
(4,800,000 x 0.816298) = 3,918,230 is not equal to 4,000,
Interpolation:
x% - 6%
The effective interest rate is 6.2695% (6% + .2695%).
Carrying amount: (4,000,000 x 106.2695%) = 4,250,
17. D
Initial measurement: (1,000,000 x PV of ordinary annuity @12%, n=4) = 3,037,
Subsequent measurement:
Date Payments Interest expense Amortization Present value Jan. 1, 20x1 3,037, Dec. 31, 20x1 1,000,000 364,482 635,518 2,401, Dec. 31, 20x2 1,000,000 288,220 711,780 1,690,
18. D
The erroneous straight-line amortization of the discount on bonds payable is computed as
follows:
Face amount of bonds 4,000,
Cash proceeds (3,807,852)
Discount on bonds payable - Jan. 1, 20x1 192,
Divide by: Term of bonds (in years) 3
Annual amortization (straight line method) 64,
Interest expense for 20x1 recognized under straight-line method:
Interest paid (4,000,000 x 10%) 400,
Amortization of discount (see computation above) 64,
Interest expense under straight-line method 464,
Carrying amount of bonds on Dec. 31, 20x1 under straight-line method:
Carrying amount - Jan. 1, 20x1 3,807,
Amortization of discount (see computation above) 64,
Carrying amount - Dec. 31, 20x1 3,871,
Amortization of discount under effective interest method:
Amortization table:
Date
Interest
payments
Interest
expense Amortization
Present
value
Jan. 1,
20x1 3,807,
Dec. 31,
20x1 400,000 456,942 56,942 3,864,
Effect on carrying amount of bonds as of Dec. 31, 20x
Carrying amounts on Dec. 31, 20x1:
Straight-line 3,871,
Effective interest rate 3,864,
Difference - overstatement under straight-line 7,
The carrying amount of the bonds on December 31, 20x1 under the straight line method is
overstated by ₱7,.
27. A
Solution:
Cash proceeds including accrued interest (4M x 97%) 3,880,
Accrued interest sold (4M x 12% x 3/12) (120,000)
Carrying amount of the bonds, April 1, 20x1 3,760,
28. A
Date Interest payments Interest expense Amortization Present value Jan. 1, 20x1 4,303, Dec. 31, 20x1 480,000 430,328 49,672 4,253, Dec. 31, 20x2 480,000 425,360 54,640 4,198, July 1, 20x3 240,000 209,948 30,052 4,168,
Carrying amount of bonds retired: (see table above) 4,168,
Retirement price (Call price):
Retirement price including payment for
accrued interest (4M x 102%) 4,080,
Accrued interest (4M x 12% x 6/12) (240,000) 3,840,
Gain on extinguishment of bonds 328,
29. B
Date Principal payments Interest on outstanding principal balance Interest payments Total payments Dec. 31, 20x1 4,000,000 12,000,000 x 10% 1,200,000 5,200, Dec. 31, 20x2 4,000,000 8,000,000 x 10% 800,000 4,800, Dec. 31, 20x3 4,000,000 4,000,000 x 10% 400,000 4,400, Date Total payments Interest expense Amortization Present value Jan. 1, 20x1 11,601, Dec. 31, 20x1 5,200,000^ 1,392,148^ 3,807,852^ 7,793,
30. D
The modification is analyzed as follows:
Old terms New terms
Principal 20,000,000 20,000,
Accrued interest 600,000 -
Remaining term ('n') 3 years
Nominal rate 12% 10%
Direct costs of
modification 200,
Future cash flows PV factors @12%, n=3 Present value
Principal 20,000,000 0.711780 14,235,
Interest 2,000,000 2.401831 4,803,
Present value of the modified liability 19,039,
Carrying amt. of old liability (20M + 600K accrued int.) 20,600,
Present value of modified liability 19,039,
Difference 1,560,
Difference 1,560,
Divide by: Carrying amount of old liability 20,600,
The modification is NOT substantial. The old liability is not extinguished and NO GAIN OR
LOSS on extinguishment is recognized. The direct costs of modification are treated as an
adjustment to the carrying amount of the existing liability.
31. B
32. A
33. A (80M x 5%) + (60M x 20%) + (40M x 35%) + (20M x 40%) = 38M
34. A
Minor repairs (40M x 3% x 10%) 120,
Major repairs (40M x 2% x 90%) 720,
Total 840,
Multiply by: Present value factor (given) 0.
Total 800,
Multiply by: Risk adjustment (100% + 6% ) 106%
Total 848,
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,
35. A 200M – without deduction for reimbursement of impairment loss
36. D
37. A (0 actual settlement – 2,800,000 carrying amount of provision) = 2,800,000 gain on
settlement
38. A [15,000 guaranteed annual purchase x 2 years x (₱ 100 - ₱20)] = 2,400,
39. A (5,000 units sold x ₱400) = 2,000,
40. D
Estimated premium liability
- Jan. 1, 20x Actual cost of premiums distributed - 20x1 (60,
x ₱400) 24,000,000^ 32,000,^
Premium expense - 20x1 (500, x 80% ÷ 5 x ₱400 ) Actual cost of premiums distributed - 20x2 (147,
x ₱400) 59,040,000 57,600,
Premium expense - 20x2 (900, x 80% ÷ 5 x ₱400 )
Dec. 31, 20x2 6,560,
Chapter 5
Employee Benefits Part 1
NAME: Date:
Professor: Section: Score:
QUIZ:
1. Depending on the expected settlement date, the liability for accumulating and vesting paid
leaves already earned by employees are presented in the employer’s statement of financial
position as
a. current liability. c. a or b
b. noncurrent liability. d. not presented.
2. PAS 19 does not apply to which of the following?
a. educational assistance given by an employer to the employee’s children
b. an annual subsidy of one sack of rice given by an employer to the employee
c. an additional allowance given to the employee through a competitive bargaining agreement
d. compensation in the form of shares of stocks
3. Fay Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales.
Sales commissions are computed and paid on a monthly basis (in the month following the
month of sale), and the fixed salaries are treated as advances against commissions. However, if
the fixed salaries for salespersons exceed their sales commissions earned for a month, such
excess is not charged back to them. Pertinent data for the month of March 20X5 for the three
salespersons are as follows:
Sales person Fixed salary Net sales Commission rate
A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Totals 42,000 1,200,
What amount should Fay accrue for sales commission payable at March 31, 20X5?
a. 70,000 b. 68,000 c. 28,000 d. 26,
4. ADHERE TO STICK Co. has the following policy:
Each employee is entitled to 12 days paid vacation leave each year.
Unused vacation leaves in a year can be carried over to the immediately following year.
Vacation leaves not taken within two years are forfeited.
The following information was determined at the reporting date:
Number of employees………………………………….……… 500
Average salary per day……………………………………..₱2,
Average annual pay increase……………………………….….5%
Vacation leaves taken during the period…………….5,400 days
Unused vacation leaves from the previous period………..….. 0
Based on past experience, 90% of unused vacation leave for a year are taken in the immediately
following year.
What is the year-end adjusting entry to accrue a liability for the unused vacation leaves?
5. ARTIFACT MAN MADE OBJECT Co.’s retirement plan has the following details:
Annual contribution to a fund held by a trustee, ₱400,000.
Upon retirement, an employee shall receive retirement benefit based on whatever amount is
accumulated on the fund.
Actual contributions to the fund were: ₱ 40 0,000 in 20x0; ₱160,000 in 20x 1 ; and ₱900,000 in
20x2. An employee retired in 20x3 and was paid a total of ₱30,000 retirement benefits.
What is the journal entry in 20x2?
"…Have I not commanded you? Be strong and courageous. Do not be frightened,
and do not be dismayed, for the Lord your God is with you wherever you go."
(Joshua 1:9)
Chapter 6
Employee Benefits Part 2
NAME: Date:
Professor: Section: Score:
QUIZ:
1. Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A for the benefit
of Entity A’s employees. When reporting to Entity A regarding the status and performance of
the fund, Entity B would most likely apply which of the following standards?
a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6
2. Which of the following statements is correct?
a. A pension plan is contributory when the employer makes payments to a funding agency.
b. An employer reports no liability on its balance sheet in a defined-contribution plan.
c. Employers are at risk with defined-benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
d. The accounting for defined contribution plans is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of actuarial
gains and losses
3. An entity has decided to improve its defined benefit pension scheme. The benefit payable will be
determined by reference to 60 years’ service rather than 80 years’ service. As a result, the defined
benefit pension liability will increase by ₱10 million. The average remaining service lives of the
employees is 10 years. How should the increase in the pension liability by ₱10 million be treated
in the financial statements?
a. The past service cost should be charged against retained profit.
b. The past service cost should be charged against profit or loss for the year.
c. The past service cost should be spread over the remaining working lives of the employees.
d. The past service cost should not be recognized.
4. On January 1, 2002, Crowther Co. has estimated a present value of defined benefit obligation of
₱440,000 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 values of the plan assets were
₱350,000 and ₱400,000 on December 31, 2001 and December 31, 2002, respectively. The present
value of the benefit obligation on December 31, 2002 was
a. 528,000. b. 580,800. c. 630,800. d. 640,800.
5. The following information relates to the defined benefit pension plan for the McDonald
Company for the year ending December 31, 2002.
Present value of defined benefit obligation, Jan. 1 4,600,
Present value of defined benefit obligation, Dec. 31 4,729,
Fair value of plan assets, January 1 5,035,
Fair value of plan assets, December 31 5,565,
Return on plan assets 450,
Employer contributions 425,
Benefits paid to retirees 390,
Discount rate 10%
Current service cost for the year would be
a. 59,000. b. 94,000. c. 129,000. d. 390,000.
6. The following information relates to Irasly Inc. at December 31, 2002:
Fair value of plan assets 1,520,
Market related asset value 1,440,
Present value of defined benefit obligation 1,960,
Projected benefit obligation 2,040,
Past service cost (recognized in full during the period) 24,
Prepaid/accrued pension cost 0
The net defined benefit liability at December 31, 2002, for Irasly Inc. is
a. 0. b. 440,000. c. 480,000. d. 520,000.
7. The following information is taken from the actuarial valuation report for an entity’s defined
benefit plan:
Fair value of plan assets, Jan. 1 2,100, Present value of defined benefit obligation, Jan. 1 2,400, Past service cost (vesting period is 5 yrs.) 300, Current service cost 600, Benefits paid to retirees during the year 450, Net gain on settlement of plan during the year 60, Actuarial gain during the period 15, Return on plan assets during the period 270, Discount rate based on high quality corporate bonds 12%
How much is the defined benefit cost?
a. 843,000 c. 876,
b. 861,000 d. 879,
Use the following information for the next two questions:
Information on STATUTE LAW Co.’s defined benefit plan is shown below:
The fair value of the plan assets on January 1, 20x1 was ₱7,200,000.
The actuarial valuation of the defined benefit obligation on January 1, 20x1 was ₱8,000,000. The
actuarial present value of future benefits earned by employees for services rendered in 20x
amounted to ₱1,200,000.
On July 1, 20x1, STATUTE Co. amended its retirement plan. The amendment increased the
present value of the defined benefit obligation by ₱1,600,000, 20% of which relates to benefits that
have already vested. The remaining portion will vest in 5 years.
Changes in actuarial assumptions resulted to a decrease of ₱640,000 in the present value of the
defined benefit obligation. It was also determined that there was an ₱80,000 decrease in the fair
value of the plan assets due to changes in fair values.
The return on plan assets amounting to ₱1,120,000 represents only the actual interest and other
investment income in 20x1.
ANSWERS:
1. C
2. C
3. B
4. B
PV of defined benefit obligation 440,000 Jan. 1 Benefits paid 60,000 148,000 Current service cost 52,800 Interest cost Dec. 31 580,
5. A
PV of defined benefit obligation 4,600,000 Jan. 1 Benefits paid 390,000 59,000 Current service cost 460,000 Interest cost Dec. 31 4,729,
6. B (1,960,000 – 1,520,000) = 440,
7. A
Service cost: (a) Current service cost 600, (b) Past service cost 300, (c) (Gain) or loss on settlement (60,000) 840, Net interest on the net defined benefit liability (asset): (a) Interest cost on the defined benefit obligation (2.4M x 12%) 288, (b) Interest income on plan assets (2.1M x 12%) (252,000) (c) Interest on the effect of the asset ceiling - 36, Defined benefit cost recognized in profit or loss 876, Remeasurements of the net defined benefit liability (asset): (a) Actuarial (gains) and losses (15,000) (b) Difference between interest income on plan assets and return on plan assets (252K - 270K) (18,000) (c) Difference between the interest on the effect of the asset ceiling and the change in the effect of the asset ceiling - Defined benefit cost recognized in OCI (33,000) Total defined benefit cost 843,
8. C
PV of defined benefit obligation
8,000,000 Jan. 1
Benefits paid 200,000 1,200,000 Current service cost
Actuarial gain a^ 640,000 720,000 Interest cost (8M x 9%)
1,600,000 Increase due to plan amendment
Dec. 31 10,680,
a The actuarial gain pertains to the decrease in the obligation due to changes in actuarial
assumptions.
Fair value of plan assets
Jan. 1 7,200,
Return on plan assets b^ 1,040,000 200,000 Benefits paid
Contributions to the fund -
8,040,000 Dec. 31
b The adjusted return on plan assets is computed as follows:
Realized gains 1,120,
Unrealized loss due to changes in fair values (80,000)
Return on plan assets 1,040,
Fair value of plan assets, Dec. 31 8,040,
PV of defined benefit obligation, Dec. 31 10,680,
Net defined benefit liability - Dec. 31 (deficit) (2,640,000)
9. C
Current service cost 1,200,
Past service cost (increase in obligation due to the amendment) 1,600,
Net loss on settlement of plan during the year -
Net interest on the net defined benefit liability (asset) c^ 72,
Defined benefit cost recognized in profit or loss 2, 872 ,
Actuarial (gain) loss (640,000)
Difference between return and interest income on plan asset (392,000)
Difference between change and interest on effect of
asset ceiling
Defined benefit cost recognized in OCI (1,^032 ,000)
Total defined benefit cost 1, 840 ,
c The net interest on the net defined benefit liability (asset) is computed as follows:
Fair value of plan assets, Jan. 1, 20x1 7,200,
Present value of defined benefit obligation, Jan. 1, 20x1 8,000,
Net defined benefit liability - Jan. 1 (deficit) 800,
Multiply by: Discount rate 9%
Net interest on the net defined benefit liability 72,
