Accounting For Pensions
Pensions in accounting are seen as future liabilities. They are seen as actions that will reduce the company’s capital when they fall due. We have covered how they are calculated and treated in the books of accounts. Test your understanding of this liability by taking the simple quiz below. Good luck!
- 1.
Companies generally design pension plans that are
- A.
Noncontributory
- B.
Contributory
- C.
Qualified
- D.
Insured
Correct Answer
C. QualifiedExplanation
Qualified pension plans refer to retirement plans that meet specific requirements set by the Internal Revenue Service (IRS) in the United States. These requirements include rules related to eligibility, vesting, funding, and distribution. Companies often design qualified pension plans to take advantage of tax benefits and ensure compliance with IRS regulations. This designation ensures that the plan meets certain standards and provides employees with certain protections and benefits.Rate this question:
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- 2.
The employer's pension expense is the amount that it is obligated to pay to the pension trust in
- A.
A defined benefit plan
- B.
A defined contribution plan
- C.
Both of the above
- D.
None of these
Correct Answer
B. A defined contribution planExplanation
The correct answer is a defined contribution plan. In a defined contribution plan, the employer's pension expense is determined by the contributions made to the plan on behalf of employees. The employer is not obligated to pay a specific amount to the pension trust, as the benefits received by employees are based on the performance of the investments in the plan. Therefore, the pension expense is not determined by the employer's obligation, but rather by the contributions made to the plan.Rate this question:
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- 3.
In a defined benefit plan, the funding level depends on the all the following factors except
- A.
Compensation levels
- B.
Interest earnings
- C.
Age of the employer company
- D.
Turnover
Correct Answer
C. Age of the employer companyExplanation
The funding level of a defined benefit plan is determined by various factors, such as compensation levels, interest earnings, and turnover. However, the age of the employer company does not directly impact the funding level of the plan. The age of the employer company may affect other aspects of the plan, such as the length of time the plan has been in existence or the company's financial stability, but it does not have a direct influence on the funding level.Rate this question:
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- 4.
A measure of an employer's pension obligation using future salary levels is the
- A.
Accumulated benefit obligation
- B.
Defined benefit obligation
- C.
Projected benefit obligation
- D.
Vested benefit obligation
Correct Answer
C. Projected benefit obligationExplanation
The projected benefit obligation is a measure of an employer's pension obligation that takes into account future salary levels. It represents the estimated amount that the employer will need to pay out in pension benefits to employees based on their projected future salaries. This measure is used to calculate the funding requirements for the pension plan and helps the employer determine the amount of contributions that need to be made to ensure the plan remains adequately funded.Rate this question:
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- 5.
Which of the following is not a component of pension expense?
- A.
Actual return on plan assets
- B.
Amortization of prior service cost
- C.
Amortization of projected benefit obligation
- D.
Gain or Loss
Correct Answer
C. Amortization of projected benefit obligationExplanation
The amortization of projected benefit obligation is not a component of pension expense. Pension expense is the cost incurred by a company to provide pension benefits to its employees. It includes various components such as the actual return on plan assets, amortization of prior service cost, and gains or losses. However, the amortization of projected benefit obligation refers to the gradual recognition of changes in the projected benefit obligation over time, and it is not directly included in the calculation of pension expense.Rate this question:
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- 6.
All of the following increase pension expense except
- A.
Service cost
- B.
Interest on the liability
- C.
Amortization of prior service cost
- D.
All of these
Correct Answer
D. All of theseExplanation
The correct answer is "all of these." This means that all of the options listed (service cost, interest on the liability, and amortization of prior service cost) increase pension expense.Rate this question:
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- 7.
Which of the following does the FASB argue indicates a more realistic measure of the employer's obligation under the pension plan on a going concern basis and should be used as the basis for determining service cost?
- A.
Vested benefit obligation
- B.
Projected benefit obligation
- C.
Accumulated benefit obligation
Correct Answer
B. Projected benefit obligationExplanation
The FASB argues that the projected benefit obligation indicates a more realistic measure of the employer's obligation under the pension plan on a going concern basis and should be used as the basis for determining service cost. This is because the projected benefit obligation takes into account future salary increases and other factors that may affect the ultimate amount of pension benefits that will be paid out to employees. It provides a more accurate estimate of the employer's long-term financial commitment to the pension plan.Rate this question:
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- 8.
Which of the following results from unexpected decreases in the pension obligation?
- A.
Asset gains
- B.
Asset losses
- C.
Liability gains
- D.
Liability losses
Correct Answer
C. Liability gainsExplanation
Unexpected decreases in the pension obligation can result in liability gains. This means that the amount of money that the company is obligated to pay in pensions decreases unexpectedly. This could happen, for example, if the company's pension investments perform better than anticipated or if the company is able to negotiate lower pension payments. In either case, the company's liability for pensions decreases, resulting in a liability gain.Rate this question:
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- 9.
Which one of the following statements related to unexpected gains and losses is not correct?
- A.
Asset gains occur when the actual return is greater than the expected return.
- B.
Asset gains and losses are recorded in an Unrecognized Net Gain or Loss account
- C.
Liability gains result from unexpected decreases in the projected benefit obligation balance
- D.
Liability gains are deferred but liability losses are recognized in the year they occur.
Correct Answer
D. Liability gains are deferred but liability losses are recognized in the year they occur.Explanation
All of the options are correct except that liability losses are deferred instead of recognized immediatelyRate this question:
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- 10.
The recognized net gain or loss balance must be amortized when it exceeds 10% of the larger of the
- A.
Beginning accumulated benefit obligation or the market related asset value
- B.
Ending accumulated benefit obligation or the market related asset value
- C.
Beginning projected benefit obligation or the market related asset value
- D.
Ending projected benefit obligation or the market related asset value
Correct Answer
C. Beginning projected benefit obligation or the market related asset valueExplanation
The recognized net gain or loss balance must be amortized when it exceeds 10% of the larger of the beginning projected benefit obligation or the market related asset value. This means that if the net gain or loss balance is greater than 10% of either the beginning projected benefit obligation or the market related asset value, it needs to be amortized. This ensures that any significant gains or losses are gradually recognized over time rather than all at once, helping to smooth out the impact on financial statements.Rate this question:
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- 11.
Which of the following losses should be recognized immediately?
- A.
Asset losses
- B.
Liability losses
- C.
Asset losses and liability losses
- D.
Losses that arise from a single occurrence such as a plant closing
Correct Answer
D. Losses that arise from a single occurrence such as a plant closingExplanation
Losses that arise from a single occurrence such as a plant closing should be recognized immediately because they are considered to be significant and non-recurring events that have a material impact on the financial statements. These losses are typically not expected to happen again in the future, so it is important to recognize them in the period in which they occur to provide accurate and transparent financial reporting.Rate this question:
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- 12.
The minimum liability is the difference between the
- A.
Accumulated benefit obligation and the market related asset value
- B.
Accumulated benefit obligation and the fair value of plan assets
- C.
Projected benefit obligation and the market related asset value
- D.
Projected benefit obligation and the fair value of plan assets
Correct Answer
B. Accumulated benefit obligation and the fair value of plan assetsExplanation
The correct answer is "accumulated benefit obligation and the fair value of plan assets". The accumulated benefit obligation represents the present value of the expected future benefit payments to employees, based on their years of service and expected salary increases. The fair value of plan assets represents the current market value of the assets held in the pension plan. The minimum liability is the difference between these two values, and it represents the amount that the company would need to contribute to the pension plan in order to fully fund the expected future benefit payments.Rate this question:
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- 13.
All of the following pension information should be disclosed in the notes to the financial statements except
- A.
The expected benefit payments to be paid to current plan participants for each of the next fiver fiscal years
- B.
A company's best estimate of expected contributions to be paid to the plan during the next year
- C.
A reconciliation showing how the projected benefit obligation and the fiar value of the plan assets changed from the beginning to the end of the period
- D.
All of the options are disclosed
Correct Answer
D. All of the options are disclosedExplanation
The correct answer is "all of the options are disclosed". This means that all of the mentioned pension information should be disclosed in the notes to the financial statements. This includes the expected benefit payments to be paid to current plan participants for each of the next five fiscal years, a company's best estimate of expected contributions to be paid to the plan during the next year, and a reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period.Rate this question:
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- 14.
When the additional liability exceeds the unrecognized prior service cost
- A.
No entry is necessary to record the liability
- B.
The additional pension liability account is decreased
- C.
The excess is debited to a contra equity account
Correct Answer
C. The excess is debited to a contra equity accountExplanation
When the additional liability exceeds the unrecognized prior service cost, the excess is debited to a contra equity account. This means that the excess amount is recorded as a decrease in the equity of the company. This is done to accurately reflect the financial position of the company and ensure that the liabilities are properly accounted for. By debiting the contra equity account, the company is able to offset the excess liability and maintain a balanced financial statement.Rate this question:
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- 15.
All of the following statements regarding theaccounting for various forms of compensation plans under iGAPP are true except
- A.
IGAPP does not recognize prior service costs on the balance sheet
- B.
For defined benefit plans, iGAAP companies have the choice of recognizing acturial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees
- C.
In order to dampen and in some cases fully eliminate the fluctuations in pension expenses, iGAAP uses smoothing provisions
- D.
IGAAP does not separate pension plans into defined contribution plans and defined benefit plans
Correct Answer
D. IGAAP does not separate pension plans into defined contribution plans and defined benefit plansExplanation
The correct answer states that iGAAP does not separate pension plans into defined contribution plans and defined benefit plans. This means that iGAAP treats all pension plans as a single category, without distinguishing between the two types of plans. However, the other statements provided are true. iGAAP does not recognize prior service costs on the balance sheet for defined benefit plans, gives companies the choice of recognizing actuarial gains and losses immediately or amortizing them, and uses smoothing provisions to reduce fluctuations in pension expenses.Rate this question:
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Quiz Review Timeline +
Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.
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Current Version
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Mar 22, 2023Quiz Edited by
ProProfs Editorial Team -
Nov 15, 2010Quiz Created by
Kosdaisy
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