INTERMEDIATE ACCOUNTING 2

PROBLEM SOLVING: DEFINED BENEFIT PLAN

(Use the below problem to answers the succeeding four (4) questions.)
At the beginning of current year, Rachel Company reported the fair value of plan assets at
P6,700,000 and projected benefit obligation at P7,600,000. The entity revealed the following
information for the current year”

Current service cost 1,450,000

Past service cost 300,000
Discount rate 10%
Actual return on plan assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000

1. What is the employee benefit expense?

a. 1,840,000 c. 2,510,000
b. 1,540,000 d. 1,750,000
(1,450,000 + 300,000 + 760,000 – 670,000)

2. What is the remeasurement gain or loss on plan assets?

a. 170,000 gain c. 670,000 gain
b. 170,000 loss d. 670,000 loss
500,000-670,000
3. What is the fair value of plan assets on December 31?
a. 8,070,000 c. 7,900,000
b. 7,400,000 d. 8,200,000
6.7M + 1.5M +500,000 – 800,000
4. What is the projected benefit obligation on December 31?
a. 8,250,000 c. 9,010,000
b. 9,050,000 d. 9,310,000
7.6M +1,450,000+300,000+760,000-800,000
(Use the below problem to answers the succeeding four (4) questions.)
Sandra Company provided the following information for the current year:

Current service cost 500,000

Interest expense on PBO 600,000
Interest income on plan assets 350,000
Loss on plan settlement before normal 250,000
retirement date
Present value of benefit obligation 950,000
settled in advance
Past service cost during the year 300,000
Actual return on plan assets 850,000
Actuarial loss on PBO during the year 200,000
Contribution to the plan 1,500,000
Benefits paid to retirees 1,000,000
Discount or settlement rate 10%

5. What is the employee benefit expense for the current year?

1
INTERMEDIATE ACCOUNTING 2
DEFINED BENEFIT PLAN
INTERMEDIATE ACCOUNTING 2
PROBLEM SOLVING: DEFINED BENEFIT PLAN

a. 1,300,000 c. 1,500,000
b. 1,050,000 d. 1,100,000
500k+600k-350k+250k+300k
6. What is the net remeasurement for the current year?
a. 500,000 gain c. 300,000 gain
b. 200,000 loss d. 300,000 loss
850k-350k-200k
7. What is the fair value of plan assets at year-end?
a. 3,650,000 c. 4,900,000
b. 4,650,000 d. 5,850,000
3.5m+1.5m+850k-1.2m-1m
8. What is the projected benefit obligation at year-end?
a. 5,650,000 c. 6,400,000
b. 6,650,000 d. 6,450,000
6m+500k+300k+600k-950k-1m+200k
9. Information on EQUANIMITY COMPOSURE Co.’s defined benefit plan is shown below:
 PV of defined benefit obligation, Jan. 1 ₱480,000
 PV of defined benefit obligation, Dec. 31 488,000
 Interest cost 10%
 Benefits paid to retirees 200,000
 Increase in present value of defined benefit obligation during the year due to
changes in actuarial assumptions 40,000

How much is the current service cost?

a. 120,000 b. 200,000 c. 160,000 d. 220,000

Solution:
PV of defined benefit obligation
480,000 Jan. 1
Benefits paid 200,000 120,000 Current service cost (squeeze)
48,000 Interest cost (480,000 x 10%)
40,000 Actuarial loss - increase in PV of PBO
Dec. 31 488,000

10. Flash Inc. has a defined benefit plan for its employees. The following information relates to
this plan:

Present value of defined benefit obligation, January 1, 2002 10,000,000

Fair value of plan assets, January 1, 2002 10,400,000
Service cost - 2002 800,000
Actual return on plan assets - 2002 900,000
Discount rate based on high quality corporate bonds 10%
Expected rate of return on assets 8%

An actuarial loss of ₱20,000 was incurred during 2002. There was no unrecognized prior service
cost or unrecognized gains or losses. Flash's defined benefit cost for the year was
a. 880,000. b. 920,000. c. 640,000. d. 988,000.

Service cost 800,000

2
INTERMEDIATE ACCOUNTING 2
DEFINED BENEFIT PLAN
INTERMEDIATE ACCOUNTING 2
PROBLEM SOLVING: DEFINED BENEFIT PLAN
Interest cost on the defined benefit obligation (10M x 10%) 1,000,000
Interest income on plan assets (10.4M x 10%) (1,040,000)
Actuarial (gains) and losses 20,000
Difference between interest income on plan assets and return
on plan assets (140,000)
Defined benefit cost 640,000

3
INTERMEDIATE ACCOUNTING 2
DEFINED BENEFIT PLAN