CHAPTER 6

EMPLOYEE BENEFITS
PROBLEMS
6 1.

(Red Hot Company) Correction: Headings of the given data, as well as

requirement (a) should be 2014, not 2013.
(a)

Beginning liability for compensated absences

6
x
420
=
P2,520

(b)

Employee Benefit Expense for Sick Leave and Vacation Leave

Sick Leave

Vacation Leave

5 x P450
10 x 420
2 x 400
2 x 380
12 x P450
12 x 420
2 x 400
5 x 380

P2,250
4,200
800
760
P5,400
5,040
800
1,900

Total

13,140
P21,150

(c)

Liability for Compensated Absences

2,520
Employee Benefit Expense Compensated Absences
10,280
Cash
12,800
Total amount paid for compensated absences
Sick leave (as computed above)
8,010
Vacation leave 7 x 450
3,150
3 x 420
1,260
1 x 380
380 4,790
12,800

(d)

Employee Benefit Expense Compensated Absences

Liability for Compensated Absences
Liability for Compensated Absences, 12/31/14
Employee
Unused Vacation Days
A. B. Santos
12-7
5
C. D. Garcia
12+6 -3
15
E. F. Cruz
2
2
G. H. Buen
51
4
Total

6-2.

P8,010

(Green Grass Company)

(a)
Total payment in 2014
35 x 12 x 450
25 x 10 x 450
Liability, beginning of 2014 (13-10) x 20 x 450)
Liability, end of 2014 (12 10) x 40 x 450)
Sick leave expense in 2014
P310,500
(b)
P36,000 (see above)
(c)

Liability for Compensated Absences

Compensated Absences
Compensated Absences
Cash
Compensated Absences
Liability for Compensated Absences

36,000
6-3.
(McKinley Company)
(a)
Vacation earned for work in 2014

10,870
10,870

Rate
P450
420
400
380

P189,000
112,500

Amount
P2,250
6,300
800
1,520
P10,870

P301,500
(27,000)
36,000

27,000
27,000
301,500
301,500
36,000

P400,000

Chapter 6 Employee Benefits

Adjustment for 10% salary increase on unused vacation at

beginning of year 10% x (500,000 300,000)
20,000
Vacation pay expense for year 2014
P420,000
(b)
Liability for accumulated vacations, 12/31/13
P500,000
Vacations taken during 2014
(300,000)
Vacation pay expense for 2014
420,000
Liability for accumulated vacations, 12/31/14
P620,000
6-4.

(Blue Jeans Company)

(a)
Retirement Benefit Expense = Required Contribution
= (P6,000,000 x 8%) + (35,000,000 - P10,000,000)
=P1,730,000
(b)

1.

Retirement Benefit Expense

Prepaid Retirement Benefit Cost
Cash

2.

Retirement Benefit Expense

1,730,000
Cash
Accrued Retirement Benefit Cost

5%

1,730,000
70,000
1,800,000
1,500,000

230,000
6-5.

(Yellow Ribbon Trading)

Defined Benefit Cost
Other
Profit or
Comprehensiv
Loss
e Income
Beginning balances
Current service cost
Interest cost
10% x 3,000,000
10% x 2,600,000
Actuarial gain or loss
Benefit obligation
Plan assets
300,000 -260,000
Benefits paid
Contributions
Ending balances
(a)

P1,000,0
00
300,000
(260,000)

Benefit Liability (Asset)

Benefit
Obligation
P3,000,00
0
1,000,000

Plan Assets
P2,600,000

300,000
260,000
100,000

100,000

(40,000)

40,000
(350,000)
900,000
3,450,000

(350,000)
1,040,00
0

60,000

4,050,00
0

Net Prepaid/Accrued Benefit Cost, December 31, 2013

P3,000,000 P2,600,000 =

(b)

Retirement benefit expense in 2014

1,040,000

(c)

Defined benefit cost taken to OCI

68

400,000
P

60,000

Chapter 6 Employee Benefits

(d)

Retirement Benefit Expense

Remeasurement of Defined Benefit Asset/
Liability OCI
Cash
Defined Benefit Liability/Asset
200,000
(e)

1,040,000
60,000
900,000

Benefit Obligation
Plan Assets

P4,050,000
3,450,000

(f)

Net defined benefit liability/asset:

Beginning balance
Underfunding (see entry d)
Ending balance
liability

P400,000 liability
200,000
P600,000

Reconciled with the memorandum records:

Defined benefit obligation
Plan assets
Net liability
6-6.

P4,050,000
3,450,000
P 600,000

(Midnight Black)
Defined Benefit Cost
Other
Profit or
Comprehensiv
Loss
e Income
Balances, beginning
Service cost
Interest cost
9% x 1,350,000
9% x 1,250,000
Actuarial loss
On benefit
obligation
On plan assets
Past service cost
Benefits paid
Contributions
Balances, end
(a)

2,000,00
0
121,500
(112,500)

Benefit Liability (Asset)

Benefit
Obligation
1,350,000
2,000,000
121,500
112,500

50,000

50,000

2,000
300,000

(2,000)
300,000
(120,000)

2,309,00
0

Plan Assets
1,250,000

52,000

Retirement Benefit Expense

Remeasurement of Defined Benefit
Liability/Asset
Cash
Defined Benefit Liability/Asset

3,701,50
0

(120,000)
2,360,000
3,600,500

2,309,000
52,000
2,360,000

1,000
(b)

Defined benefit liability, end

Beginning balance
(1,350,000 1,250,000)
Underfunding

1,000
Defined benefit liability, end
P101,000
Or P3,701,500 P3,600,500 =
P101,000
6-7.

Brown Cup

69

P100,000

Chapter 6 Employee Benefits

Defined Benefit Cost

Other
Profit or
Comprehensiv
Loss
e Income
Beginning balances
Current service cost
Interest cost
10% x 8,200,000
10% x 8,500,000
Actuarial gain or loss
On Benefit
Obligation
On Plan Assets
780,000-850,000
Contribution
Ending balances
(a)
(b)

Benefit Liability (Asset)

Benefit
Obligation
8,200,000
1,200,000

1,200,00
0
820,000
(850,000)

820,000
850,000
(40,000)

(40,000)*

70,000
1,170,00
0

30,000

10,180,0
00

*Squeezed
P8,200,000 P8,500,000
Actuarial gain or loss
On plan assets

Plan Assets
8,500,000

(70,000)
1,500,000
10,780,00
0

P300,000 asset
780,000 850,000

70,000

loss
On benefit obligation (squeezed, see above)

40,000

gain
(c)

Defined Benefit Cost

In profit or loss
1,170,000
In other comprehensive income
30,000
(d)

Retirement Benefit Expense

Remeasurement of Defined Benefit
Asset/Liability OCI
Defined Benefit Liability/Asset
Cash

1,170,000
30,000
300,000
1,500,000

(e)

Defined Benefit Asset:

Beginning balance
Overfunding (1,500,000 1,200,000)
300,000
Ending balance asset
P600,000
(f)

Remeasurement of Defined Benefit

Asset/Liability OCI
Defined Benefit Asset/Liability

P300,000

50,000

50,000
6-8.

(White Flower Company)

(a)
Fair value of plan asset, ending
Fair value of plan assets, beginning
Contributions to the plan
Benefits paid
Balance, before actual return
Actual return on plan assets

P4,950,000
P4,600,000
500,000
(700,000)
P4,400,000
P 550,000

(b)

Actual return

70

550,000

Chapter 6 Employee Benefits

Expected return based on interest rate of 10%

10% x P4,600,000
Actuarial gain taken to OCI
6-9.

460,000
90,000

(Orange Gem Company)

(a)
Worksheet
Defined Benefit Cost
Other
Profit or
Comprehensiv
Loss
e Income
Beginning balances
Current service cost

Benefit Liability (Asset)

Benefit
Obligation
9,000,000
1,000,000

1,000,00
0

Interest cost
10% x 9,000,000
10% x 8,000,000

900,000
(800,000
)

Actuarial gain/loss
Benefit obligation
Plan assets
(640,000-800,000)
Benefits paid
Contributions
Past service cost
Ending balances

900,000
800,000
(50,000)*

(50,000)*

160,000

800,000
1,900,00
0

110,000

*squeezed
Retirement Benefit Expense
Remeasurement of Defined Benefit
Liability/Asset OCI
Defined Benefit Liability/Asset
2,010,000
(b)

(600,000)

(160,000)
(600,000)
2,000,000

800,000
11,050,00
0

10,040,000

1,900,000

Defined Benefit Liability/Asset

Cash
(c)

Plan Assets
8,000,000

110,000

2,000,000
2,000,000

Defined Benefit Liability/Asset, Dec. 31, 2014

Beginning balance (9,000,000 8,000,000)
P1,000,000
Underfunding (2,010,000 2,000,000)

10,000
Defined benefit liability, Dec. 31, 2014
P1,010,000
(d)

Or 11,050,000 10,040,000
P1,010,000
MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4
MC5

C
B
A
D
D

Problems
MC17
B
MC18
D

MC6
MC7
MC8
MC9
MC10

A
A
A
A
D

MC11
MC12
MC13
MC14
MC15
MC16

D
A
C
B
A
B

140,000 + 9%(3,200,000) 9%(3,000,000) = 158,000

185,000 270,000 = 85,000; 85,000 + 20,000 = 105,000 loss

71

Chapter 6 Employee Benefits

MC19

MC20
MC21
MC22
MC23
MC24

A
B
B
A
A

MC25
MC26
MC27

B
C
D

MC28

MC29
MC30

D
C

MC31
MC32
MC33

A
A
A

MC34

MC35
MC36

D
C

158,000 +105,000 = 263,000 total retirement benefit cost

263,000 204,000 = 59,000 underfunding;
200,000 beg. Liability + 50,000 underfunding = 259,000
3,200,000 2,500,000 + 800,000 340,000 = 240,000
240,000 (10% x 2,500,000) = 10,000 loss
5,000,000 3,800,000 = 1,200,000 liability
Full amount of past service cost is recognized as expense
Actuarial gain or loss is taken to other comprehensive income, not
in profit or loss
600,000 + 580,000 + 12%(5,000,000 3,800,000) = 1,324,000
3,800,000 + 550,000 + 750,000 = 5,100,000
ABO= 5,000,000 + 600,000 + 580,000 + 12% (5,000,000) 70,000 =
6,710,000
Total retirement benefit cost = 1,324,000 70,000 (550,000456,000) = 1,160,000; 1,160,000 750,000 = 410,000 underfunding
ABO= 6,710,000; PA = 5,100,000; 6,710,000 5,100,000 =1,610,000
Actuarial loss on plan assets = 5,565,000 (5,035,000+503,500 +
425,000 390,000) = 8,500
Actuarial gain on benefit obligation = 32,500 + 8,500 = 41,000
Service cost = 5,629,000 (4,600,000 + 460,000 - 41,000 390,000)
=1,000,000 (or prepare worksheet and squeeze)
503,500 8,500 = 495,000
1,000,000 + 460,000 503,500 32,500 = 924,000
600,000 240,000 = 360,000 (Current service cost is fully funded,
so the underfunding arises from past service cost.)
4,400,000 + 12%(4,400,000) + 1,480,000 50,000 - 600,000 =
5,758,000
2,400,000 + 300,000 2,500,000 = 200,000 liability
4,200,000 3,300,000 = 900,000 asset; however, the asset amount
is limited by the present value of future refunds and reductions in
future contributions of P500,000; so the defined benefit asset will
be shown at P500,000 only.

72