Employee Benefits (Part 2) : Problem 1: True or False

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Chapter 6
Employee Benefits (Part 2)
PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE – only the net defined benefit liability (asset) is
recognized in the accounts and in the financial statements. The
PV of DBO is disclosed only.
7. FALSE
8. TRUE
9. TRUE
10. TRUE
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B
2. D
3. A
4. B
5. A
6. D
7. C – the event is “curtailment,” which results in past service
cost. Past service cost can be either positive (increase in PV of
DBO) or negative (decrease in PV of DBO). In the problem, it
is the latter case.
Choice (a) is correct. The termination benefits paid to the

terminated employees increase the termination benefits expense
for the period.
Choice (b) is correct (see discussion above).
Choice (d) is correct. A decrease in PV of DBO either decreases the
net defined benefit liability or increases the net defined benefit
asset.
8. C
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Side note: The IASB opined that “early retirements” are accounted
for as post-employment benefits rather than termination benefits
because the benefits pertain to employee service rather than the
employer’s act of terminating the employee.
9. D
10. D
PROBLEM 3: EXERCISE
Requirement (a):
Fair value of plan assets
Jan. 1 2,100,000
Benefits
Return on plan assets 270,000 450,000
paid
Contributions to the fund 480,000
2,400,000 Dec. 31
PV of defined benefit obligation

Jan. 1
2,400,000
Benefits paid 450,000 600,000 Current service cost
300,000 Past service cost
Actuarial gain 15,000 288,000 Interest cost
Dec. 31
3,123,000
Jan. 1, 20x1 Dec. 31, 20x1

FVPA 2,100,000 2,400,000
PV of DBO 2,400,000 3,123,000
Net defined benefit liability
(300,000) (723,000)
Requirement (b):
Service cost:
(a) Current service cost 600,000
(b) Past service cost 300,000
(c) (Gain) or loss on settlement -
900,000
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Net interest on the net defined benefit liability (asset):

(a) Interest cost on the defined benefit obligation (2.4M x
288,000
12%)
(b) Interest income on plan assets (2.1M x 12%) (252,000)
(c) Interest on the effect of the asset ceiling -
36,000
Defined benefit cost recognized in profit or loss 936,000
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 903,000
Requirement (c):
20x Net defined benefit liability 480,000
1
Cash 480,000
to record the contributions to the fund
Dec. Retirement benefits expense 936,000
31,
Remeasurement of def. benefit liab. 33,000
20x
1 Net defined benefit liability 903,000
to record the defined benefit cost
Requirement (d):
Report form:
Net defined benefit liability, beg. 300,000
Contributions to the fund (480,000)
Defined benefit cost 903,000
Net defined benefit liability, end. 723,000
OR
T-account form:
300,000 Jan. 1
Page | 4
Defined benefit
480,000 903,000
Contributions to the fund cost
Dec. 31 723,000
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Jan. 1 360,000
Benefits
paid
800,000 Dec. 31
2. B
Jan. 1 234,000
Benefits
paid
299,000 Dec. 31
3. C
280,000 Jan. 1
30,800 Interest cost
Actuarial gain 50,000
Dec. 31 190,800
4. A
130,000 Jan. 1
50,000 Actuarial loss
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Dec. 31 110,600
5. A
Jan. 1 960,000
Benefits
paid
Contributions to the
360,000
fund
1,100,000 Dec. 31

1,200,000 Jan. 1
Actuarial gain 28,000 108,000 Interest cost

Dec. 31 1,250,000
Jan. 1, 20x1 Dec. 31, 20x1
FVPA 1,100,000
960,000
PV of DBO 1,200,000 1,250,000

(240,000) (150,000)
Service cost:
(a) Current service cost
260,000
(b) Past service cost -
260,000
(a) Interest cost on the defined benefit obligation
108,000
(b) Interest income on plan assets
(86,400)
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21,600
Defined benefit cost recognized in profit or loss
281,600

(a) Actuarial (gains) and losses
(28,000)
and return on plan assets (86.4K - 70K)
16,400
Defined benefit cost recognized in OCI

(11,600)
Total defined benefit cost

270,000
6. C
Service cost:
(c) (Gain) or loss on settlement 45,000
1,035,000
(a) Interest cost on the defined benefit obligation 198,000
(b) Interest income on plan assets (178,200)
19,800
Defined benefit cost recognized in profit or loss 1,054,800

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(b) Difference between interest income on plan assets 70,200

and return on plan assets
(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 52,200
Total defined benefit cost 1,107,000
7. B
Final monthly salary level (60K x 102%(a)) 73,140
Multiply by: Years of service (from 50 to 60 yrs. old) 11
Lump-sum retirement benefit 804,540
(a)
ten (10) times
OR
Year Age Salary
= previous balance x 102%
1 50 60,000
2 51 61,200
3 52 62,424
4 53 63,672
5 54 64,946
6 55 66,245
7 56 67,570
8 57 68,921
9 58 70,300
10 59 71,706
11 60 73,140
OR
60,000 x FV of 1 @2%, n=11; 60,000 x 1.218994 = 73,140
Final monthly salary level 73,140

Multiply by: PV of 1 @10%, n=10 (b) 0.385543
Current service cost in Yr. 1 28,199
(b)
From end of Yr. 1 to end of Yr. 11 = 10
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8. A
Final monthly salary level 73,140
Multiply by: 5
Accumulated benefits to date 365,700
Multiply by: PV of 1 @10%, n=6 (c) 0.564474
Lump-sum retirement benefit 206,428
(c)
From end of Yr. 5 to end of Yr. 11 = 6
Alternative solution: Long-cut

Interest Current service
Date PV of DBO
cost cost(d)
Jan. 1, 20x1 -
Dec. 31, 20x1 - 28,198.64 28,198.64
Dec. 31, 20x2 2,819.86 31,018.50 62,037.00
Dec. 31, 20x3 6,203.70 34,120.35 102,361.05
Dec. 31, 20x4 10,236.10 37,532.38 150,129.54
Dec. 31, 20x5 15,012.95 41,285.62 206,428.12
Dec. 31, 20x6 20,642.81 45,414.19 272,485.11
Dec. 31, 20x7 27,248.51 49,955.60 349,689.23
Dec. 31, 20x8 34,968.92 54,951.16 439,609.32
Dec. 31, 20x9 43,960.93 60,446.28 544,016.53
Dec. 31, 20x10 54,401.65 66,490.91 664,909.09
Dec. 31, 20x11 66,490.91 73,140.00 804,540.00
(d)
PV of 1 @ 10%, n=10 to Current service
Benefit entitlement 0 cost
73,140 0.38554329 28,198.64
73,140 0.42409762 31,018.50
73,140 0.46650738 34,120.35
73,140 0.51315812 37,532.38
73,140 0.56447393 41,285.62
73,140 0.62092132 45,414.19
73,140 0.68301346 49,955.60
73,140 0.75131480 54,951.16
73,140 0.82644628 60,446.28
73,140 0.90909091 66,490.91
73,140 1.00000000 73,140.00
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804,540
9. A
10. C 30 employees x 50,000 = 1,500,000

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PROBLEM 5: CLASSROOM ACTIVITY
1. Solution:

4,645,541 Jan. 1, 20x1
Benefits paid - 239,152 Current service cost
250,395 Interest cost *
Actuarial gain 646,794 Actuarial loss
Dec. 31, 20x1 4,488,294
* (4,645,541 x 5.39% discount rate at the beginning of 20x1) = 250,395
2. Solution:
Jan. 1
1,176,732
Benefits
Return on plan assets 11,672 -
paid
Contributions to the
474,934
fund
1,663,338 Dec. 31
3. Solution:
20x1 20x0
Present value of defined benefit obligation (DBO) 4,488,294 4,645,541
Fair value of plan assets (FVPA) 1,663,338 1,176,732
Net defined benefit liability – Deficit 2,824,956 3,468,809
4. Solution:
Service cost:
(b) Past service cost -
239,152
(a) Interest cost on the defined benefit obligation 250,395
(b) Interest income on plan assets (given) (77,179)
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173,216

and return on plan assets (77,179 - 11,672) 65,507
ceiling and the change in the effect of the asset ceiling
Defined benefit cost recognized in OCI (581,287)
Total defined benefit cost (168,919)
5. Solution:
Net defined benefit liability (asset) - Jan. 1, 20x1 3,468,809
Contributions (474,934)
Defined benefit cost (168,919)
Net defined benefit liability (asset) - Dec. 31, 20x1 2,824,956
6. Solution:
Dec. 31, Net defined benefit liability 643,85

20x1 (squeeze) 3
Retirement benefits expense 412,36
Remeasurement of defined 8 581,287
benefit pension plan 474,934
Cash (contributions)
7. D
☞ Choice (a) is incorrect. No retirement benefits were paid
during the year.
☞ Choice (b) is incorrect. The total salaries paid during 20x1
decreased. Refer to “Annual covered payroll” in the
“Summary of Valuation Results.”
Page | 12
☞ Choice (c) is incorrect. ABC Co.’s retirement plan provides for

a lump sum payment only. It does not provide for annual
pension payments.
8. A
☞ Asset ceiling is “the present value of any economic benefits
available in the form of refunds from the plan or reductions in
future contributions to the plan.” (PAS 19.8)
☞ (See #14 ‘Forfeiture of benefits’ in ‘EXCERPT 6 - OUTLINE OF
BASIC PLAN PROVISIONS’)
☞ Choices (b) and (c) are incorrect. Amendment of retirement

plan results to either positive or negative past service cost.
☞ Choice (d). Death or disability of an employee does not relieve
the company of its obligation to pay retirement benefits. See #9
in “Outline of Basis Plan Provisions.”
9. D (See #16 and #17 of ‘EXCERPT 6 - OUTLINE OF BASIC

PLAN PROVISIONS’)
10. B (See ‘STATISTICAL DISTRIBUTION OF ELIGIBLE

MEMBERS’)
11. D
12. A
☞ Information from excerpts:
Number of male employees: 2
Average age of male employees: 51.5
☞ 51.5 = (65 age of Mr. A + X age of Mr. B) ÷ 2

☞ 51.5 x 2 = (65 + X)
☞ 103 – 65 = X
☞ X = 38
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13. B: 4 employees (3 + 1) (see highlighted numbers below.
STATISTICAL DISTRIBUTION OF ELIGIBLE MEMBERS

AS OF DEC. 31, 20X1

AGE less 5 but less 10 but less 15 but less 20 years TOTA
than 5 than 10 than 15 than 20 & above L
yrs.
20 &
below
21 - 25 1 1
26 - 30 -
31 - 35 -
36 - 40 1 1 2
41 - 45 1 1
46 - 50 1 1
51 - 55 1 1
56 - 60 1 1 2
61 - 65 1 1
66 &
above -
TOTAL 4 1 3 - 1 9
14. D
ABC’s retirement policy:
“Normal retirement date: The normal retirement date of each
member shall be the first day of the month coincident with or next
following his attainment of age sixty (60) with at least ten (10)
years of Credited Service.”
15. A – See #8 in “Outline of Basic Plan Provisions.”
16. D – There was an actuarial gain during the year. This has
decreased the PV of DBO.
☞ Choice (b) is a correct statement. The ₱65,507 remeasurement

is a debit (refer to the computation of defined benefit cost in #4
above).
17. B
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18. D – The actuary’s opinion shows the following:
RE: ABC CO. RETIREMENT PLAN (PAS 19 VALUATION)

(Participant to the ABC Co. Multiemployer Retirement Plan)
Valuation Date – December 31, 20x1
19. D – best answer. See discussion below:

☞ Choice (a) is incorrect. Same discount rate is used in
computing for interest income on FVPA and interest expense
on PV of DBO.
☞ Choice (b) is incorrect. An employee can estimate his/her
retirement pay using the plan formula, which is “1 month final
salary x No. of service years.”
☞ Choice (c) is incorrect. No retirement benefits were paid
during 20x1.
20. C (27,000 x 102%) = 27,540
21. D
Solution:
Mont
Day Year
h
Date of birth 8 14 1980
Normal retirement age 60
Date of retirement 8 14 2040
ABC Co.’s retirement policy:

following his attainment of age sixty (60).”
22. A
Solution:
Mont Da
Year
h y
Date of employment as "Regular"
1 1 2001
employee
Minimum service years 10
1 1 2011
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23. A
Solution:
Month Day Year
employee 6 1 2001
-195
Date of birth -6 -1 1
0 0 50
Age at date of employment 50
Mont
h Day Year
employee 6 1 2001
Minimum service years 10
6 1 2011
ABC’s retirement policy:

following his attainment of age sixty (60) with at least ten (10)
years of Credited Service.”
24. C
Solution:
Month Day Year
employee 6 1 2001
-195
Date of birth
-9 -1 1
-3 0 50
Age at date of employment

49
Mont
Day Year
h
Date of birth 9 1 1951
Normal retirement age 60
Page | 16
Month Day Year

Date of employment as "Regular" -200
-6 -1
employee 1
Service years 3 0 10
No. of service years 10 yrs. and 3 mos.
Choice (a) is incorrect because, on June 1, 2011, Ms. Munda has

not yet reached the age of 60.
Mont
Day Year
h
Birth date -9 -1 -1951
Age at date of retirement -3 0 60
59 yrs. and 3
Age on June 1, 2011
months
Choice (b) is incorrect because, according to ABC’s retirement

plan, an employee only needs to reach the age of 60 and has
rendered at least 10 years of service to be entitled to normal
retirement.
Choice (d) is incorrect because the dates are irrelevant.
25. A
Solution:
Mont
h Day Year
Date of employment 1 1 1985
Date of birth -12 -31 -1944
Page | 17
-11 -30 41
Age at date of employment 40
Mont
Day Year
h
Date of employment 1 1 1985
No. of service years before reaching
the 20
age of 60
26. B
Solution:
Final monthly salary level (600K ÷ 12) 50,000

Multiply by: Service years 20
Lump sum retirement benefit 1,000,000
27. C
Benefit earned for services rendered in 20x1 50,000
Multiply by: PV of 1 @ 4.64%a, n=3 0.87278

Current service cost 43,639
a
4.64% = Discount rate at December 31, 20x1.
b
No. of years before retirement
Mont
h Day Year
Expected normal retirement date 1 1 2005
End of reporting period -12 -31 -2001
-11 -30 4
No. of years before retirement 3

Page | 18
28. B
Solution:
Month Day Year
1 1 1990
employee
Date of birth -12 -31 -1944
Age at date of retirement -11 -30 46
Age at date of employment

45
Mont
Day Year
h
1 1 1990
employee
Service years before reaching the age of 60 15
Mont
Day Year
h
End of current reporting period -12 -31 -2001
-11 -30 4
No. of years before retirement 3
Current salary level - Dec. 31, 2001 30,000

Multiply by: (Salary level in 2002) 102%
Future salary level - Jan. 1, 2005 31,836.24

Multiply by: No. of service years 15
Lump sum retirement benefit 477,544
29. C
Solution:
Page | 19
(40,000 x PV of 1 @ 4.64%, n=22*) = 14,747
*(60 age of normal retirement – 38 current age) = 22 no. of years

before retirement
30. A
Solution:
Month Day Year
1 1 2002
-7 -1 -1990
-6 0 12
Years of service 11.5

Percentage of benefit (see 'OUTLINE OF BASIC PLAN
PROVISIONS' #8) 55%
Final monthly salary level (240K ÷ 12) 20,000

Multiply by: Years of service 11.5
Multiply by: Percentage of benefit 55%
Termination benefits 126,500
Page | 20
PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Jan. 1 240,000
Benefits
paid
420,000 Dec. 31
2. Solution:
200,000 Jan. 1
Benefits
60,000 40,000 Current service cost
paid
Interest cost (200K x
24,000
12%)
30,000 Actuarial loss
Dec. 31 234,000
3. Solutions:
Requirement (a):
Present value of defined benefit obligation, Jan. 1
1,800,000
Fair value of plan assets, Jan. 1
1,500,000
Deficit - Net defined benefit liability - Jan. 1 300,000
Requirement (b):
1,800,000 Jan. 1
Actuarial
10,000
gain
Dec. 31 2,381,000

Jan. 1 1,500,000
Page | 21
Benefits
paid
1,650,000 Dec. 31
Present value of defined benefit obligation, Dec. 31 2,381,000

Fair value of plan assets, Dec. 31 1,650,000
Deficit - Net defined benefit liability - Dec. 31 731,000
4. Solution:
Service cost:
(c) (Gain) or loss on settlement 40,000
640,000
(a) Interest cost on the defined benefit obligation (1.6M x
160,000
10%)
(b) Interest income on plan assets (1.4M x 10%) (140,000)
20,000

(a) Actuarial loss 10,000
and return on plan assets (140,000 - 90,000) 50,000
Defined benefit cost recognized in OCI 60,000
Total defined benefit cost 720,000

Employee Benefits (Part 2) : Problem 1: True or False

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Employee Benefits (Part 2) : Problem 1: True or False

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Page | 1

PROBLEM 1: TRUE OR FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

Choice (a) is correct. The termination benefits paid to the

PV of defined benefit obligation

Jan. 1, 20x1 Dec. 31, 20x1

Net interest on the net defined benefit liability (asset):

Remeasurements of the net defined benefit liability (asset):

Total defined benefit cost 903,000

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

PV of defined benefit obligation

Jan. 1, 20x1 Dec. 31, 20x1

Net defined benefit liability

(c) Interest on the effect of the asset ceiling -

Remeasurements of the net defined benefit liability (asset):

Defined benefit cost recognized in OCI

Total defined benefit cost

Remeasurements of the net defined benefit liability (asset):

(b) Difference between interest income on plan assets 70,200

Total defined benefit cost 1,107,000

Final monthly salary level 73,140

Alternative solution: Long-cut

10. C 30 employees x 50,000 = 1,500,000

PROBLEM 5: CLASSROOM ACTIVITY

PV of defined benefit obligation

* (4,645,541 x 5.39% discount rate at the beginning of 20x1) = 250,395

(c) Interest on the effect of the asset ceiling -

Remeasurements of the net defined benefit liability (asset):

Total defined benefit cost (168,919)

Dec. 31, Net defined benefit liability 643,85

☞ Choice (c) is incorrect. ABC Co.’s retirement plan provides for

☞ Choices (b) and (c) are incorrect. Amendment of retirement

9. D (See #16 and #17 of ‘EXCERPT 6 - OUTLINE OF BASIC

10. B (See ‘STATISTICAL DISTRIBUTION OF ELIGIBLE

☞ 51.5 = (65 age of Mr. A + X age of Mr. B) ÷ 2

13. B: 4 employees (3 + 1) (see highlighted numbers below.

STATISTICAL DISTRIBUTION OF ELIGIBLE MEMBERS

15. A – See #8 in “Outline of Basic Plan Provisions.”

☞ Choice (b) is a correct statement. The ₱65,507 remeasurement

18. D – The actuary’s opinion shows the following:

RE: ABC CO. RETIREMENT PLAN (PAS 19 VALUATION)

19. D – best answer. See discussion below:

20. C (27,000 x 102%) = 27,540

ABC Co.’s retirement policy:

Age at date of employment 50

ABC’s retirement policy:

Age at date of employment

Date of retirement 9 1 2011

Month Day Year

No. of service years 10 yrs. and 3 mos.

Choice (a) is incorrect because, on June 1, 2011, Ms. Munda has

Choice (b) is incorrect because, according to ABC’s retirement

Choice (d) is incorrect because the dates are irrelevant.

Age at date of employment 40

Final monthly salary level (600K ÷ 12) 50,000

Benefit earned for services rendered in 20x1 50,000

Multiply by: PV of 1 @ 4.64%a, n=3 0.87278

No. of years before retirement 3

Age at date of employment

No. of years before retirement 3

Current salary level - Dec. 31, 2001 30,000

Future salary level - Jan. 1, 2005 31,836.24

(40,000 x PV of 1 @ 4.64%, n=22*) = 14,747