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Chapter 6
Employee Benefits Part 2
1. Which of the following components should be included in the calculation of net defined benefit
cost recognized for a period by an employer sponsoring a defined benefit pension plan?

Actual Return Amortization of

on Plan Assets, Unrecognized Prior Interest
If Any Service cost, If Any Cost

a. No No Yes
b. Yes No Yes
c. Yes Yes No
d. Yes Yes Yes

2. Which of the following concepts for postretirement benefit plans is comparable to the projected
unit credit method of pension plans?
a. Accrued benefit method pro-rated on service
b. Expected Postretirement Benefit Obligation (EPBO)
c. Actual return on plan assets
d. Expected return on plan assets

3. Which of the following statements is incorrect?

a. Minimum (corridor) amortization of net unrecognized gain or loss is allowed for
postretirement benefit plans.
b. Gains and losses on settlement of defined benefit retirement plans are recognized
immediately.
c. Actuarial gains and losses are recognized immediately.
d. Past service costs are recognized immediately.

4. The interest cost component of the net defined benefit cost is determined using
a. the settlement rate of interest.
b. the rate of return on high quality corporate bonds
c. both a and b.
d. neither a or b.

5. Financial reporting standards for pension currently in effect

a. allow both the accrued benefit and projected benefit methods.
b. allow only the accrued benefit method/ projected unit credit method.
c. allow only the projected benefit method.
d. do not allow either the accrued benefit or projected benefit methods.

6. Which of the following is not correct?

a. PAS 19 does not include any provisions for the recognition of an additional minimum
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liability.
b. PAS 19 does not allow for the recognition of a net pension asset equal to the computed
surplus in some circumstances.
c. PAS 19 requires the 10% corridor amount in calculating the amortization of deferred gains
and losses.
d. PAS 19 requires settlement gains and losses to be recognized immediately as part of
comprehensive income.

7. These are changes in the present value of the defined benefit obligation resulting from
experience adjustments and the effects of changes in actuarial assumptions.
a. Past service cost c. Settlement gains and losses
b. Actuarial gains and losses d. Interest cost

8. All of the following are demographic assumptions except:

a. future medical costs
b. mortality, both during and after employment
c. rates of employee turnover, disability and early retirement
d. claim rates under medical plans

9. According to PAS 19, which of the following is not a financial assumption?

a. the discount rate
b. future salary and benefit levels
c. the expected rate of return on plan assets
d. the proportion of plan members with dependents who will be eligible for benefits

10. According to PAS 19, the rate used to discount post-employment benefit obligations shall be
determined by reference to market yields at the end of the reporting period on
a. risk-free rate c. current bank rate
b. high quality corporate bonds d. effective interest rate

“Education is the passport to the future, for tomorrow belongs to those who prepare for it today.”
- Malcolm X

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ANSWERS TO QUIZ 1:
1. A 6. C
2. A 7. B
3. A 8. A
4. B 9. D
5. B 10. B
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1. The following information relates to the defined benefit pension plan of the McDonald Company
for the year ending December 31, 2002:

PV of defined benefit obligation, January 1 ₱4,600,000

PV of defined obligation, December 31 4,729,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Interest income on plan assets 450,000
Actuarial loss 32,500
Employer contributions 425,000
Benefits paid to retirees 390,000
Discount rate 10%

The net amount of remeasurement of the net defined benefit liability (asset) included in the defined
benefit cost for 2002 would be
a. 77,500. b. 47,500. c. 32,500. d. 12,500.

2. 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.

3. 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

Use the following information for the next two questions:

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PELLUCID CLEAR Co. agrees to provide lump-sum retirement benefits to employees equal to 6% of
final salary for each year of service. Information on an employee is shown below:
 Average annual salary level on January 1, 20x1 ₱12,000,000
 Average annual salary increase starting January 1, 20x2 and every year
thereafter. 3%
 Average service lives before entitlement to retirement benefits (January 1,
20x1 to December 31, 20x5) 5 years
 Discount rate per year 10%

4. How much is the current service cost in 20x2?

a. 553,492 b. 669,724 c. 618,724 d. 608,840

5. How much is the present value of the defined benefit obligation on December 31, 20x2?
a. 1,298,437 b. 1,217,680 c. 1,085,710 d. 1,908,117

“And we know that in all things God works for the good of those who love him, who have been called
according to his purpose.” – (Romans 8:28)
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SOLUTIONS
1. D
Solution:

Remeasurements of the net defined benefit liability (asset):

(a) Actuarial (gain) loss 32,500
(b) Difference between interest income on plan assets
and return on plan assets (450,000 - 495,000) (45,000)
(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 12,500

Fair value of plan assets

Jan. 1 5,035,000
Return on plan assets 495,000 390,000 Benefits paid
Contributions to the fund 425,000
5,565,000 Dec. 31

2. C
Solution:

Service cost 800,000

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. A
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

4. D
Solution:
Final salary level (12M x 103% x 103% x 103% x
103%) 13,506,106
Multiply by: Percentage of benefit per year 6%
Benefit per year of service 810,366
Multiply by: No. of service years 5
4,051,83
Lump sum retirement benefit 2

(13,506,106 x 6%) = 810,366 benefit entitlement per year;

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(810,366 x PV of 1 @10%, n=3) = 608,840 current service cost in 20x2 *(n=3 is from December 31, 20x2
to December 31, 20x5)

5. B
Solution:
(13,506,106 x 6%) = 810,366 benefit entitlement per year;
(810,366 x 2 years passed x PV of 1 @10%, n=3) = 1,217,680