MA.

CRHISTHIEN ARNAN BSA-2 ACC227 E-

PORTFOLIO

Chapter 6
Employee Benefits (Part 2)

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. TRUE
3. TRUE 8. FALSE
4. TRUE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B

2. E

3. A

4. B

5. D

6. B

7. C

8. Solution:
PV of defined benefit obligation
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

9. Solution:
Fair value of plan assets
Jan. 1 240,000  

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Return on plan assets 20,000 60,000 Benefits paid
Contributions to the fund 220,000
420,000 Dec. 31

10. 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):
PV of defined benefit obligation
  1,800,000 Jan. 1
Benefits paid 75,000 450,000 Current service cost
216,000 Interest cost
Actuarial gain 10,000  
Dec. 31 2,381,000

Fair value of plan assets

Jan. 1 1,500,000  
Return on plan assets 180,000 75,000 Benefits paid
Contributions to the fund 45,000
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

11. Solution:

Service cost:
(a) Current service cost 400,000

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(b) Past service cost 200,000
(c) (Gain) or loss on settlement 40,000
640,000
Net interest on the net defined benefit liability (asset):
(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)
(c) Interest on the effect of the asset ceiling -
20,000
Defined benefit cost recognized in profit or loss 660,000

Remeasurements of the net defined benefit liability (asset):

(a) Actuarial loss 10,000
(b) Difference between interest income on plan assets
and return on plan assets (140,000 - 90,000) 50,000
(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 60,000

Total defined benefit cost 720,000

PROBLEM 3: EXERCISES

1. Solution:
PV of defined benefit obligation
  280,000 Jan. 1
Benefits paid 120,000 50,000 Current service cost
30,800 Interest cost
Actuarial gain 50,000  
Dec. 31 190,800

2. Solution:

PV of defined benefit obligation

  130,000 Jan. 1
Benefits paid 110,000 25,000 Current service cost
15,600 Interest cost
50,000 Actuarial loss

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 Dec. 31 110,600

3. Solution:
Fair value of plan assets
Jan. 1 360,000  
Return on plan assets 80,000 120,000 Benefits paid
Contributions to the fund 480,000
800,000 Dec. 31

4. Solution:
Fair value of plan assets
Jan. 1 234,000  
Return on plan assets 24,000 79,000 Benefits paid
Contributions to the fund 120,000
299,000 Dec. 31

5. Solution:

Service cost:
(a) Current service cost 600,000
(b) Past service cost 300,000
(c) (Gain) or loss on settlement (60,000)
840,000
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the defined benefit obligation (2.4M x 12%) 288,000
(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 876,000

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)

4
Total defined benefit cost 843,000

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PROBLEM 4: CLASSROOM ACTIVITY

1. Solution:

PV of defined benefit obligation

  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:
Fair value of plan assets
1,176,73
Jan. 1
2  
Return on plan assets 11,672 - Benefits paid
Contributions to the fund 474,934
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
2,824,95 3,468,80
Net defined benefit liability – Deficit
6 9

4. Solution:
Service cost:
(a) Current service cost 239,152
(b) Past service cost -
(c) (Gain) or loss on settlement -
239,152
Net interest on the net defined benefit liability (asset):
(a) Interest cost on the defined benefit obligation 250,395
(b) Interest income on plan assets (given) (77,179)
(c) Interest on the effect of the asset ceiling -
173,216
Defined benefit cost recognized in profit or loss 412,368

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Remeasurements of the net defined benefit liability (asset):
(a) Actuarial (gains) and losses (646,794)
(b) Difference between interest income on plan assets
and return on plan assets (77,179 - 11,672) 65,507
(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 (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 (squeeze) 643,853

20x1 Retirement benefits expense 412,368
Remeasurement of defined
benefit pension plan 581,287
Cash (contributions) 474,934

7. D

8. A (See #14 ‘Forfeiture of benefits’ in ‘EXCERPT 6 - OUTLINE OF BASIC 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

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12. A
Solution:
Mr. A 65
Mr. B (squeeze) 38
Total 103
Divide by: 2
Average age in years - male (start) 51.5

13. D Answer: 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 15 but 20 TOTAL
than 5 than 10 less than less than years &
yrs. 15 20 above
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

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16. D

17. B

18. D

19. D

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

21. D
Solution:
Month Day Year
Date of birth 8 14 1980
Normal retirement age 60
Date of retirement 8 14 2040

ABC Co.’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).”

22. A
Solution:
Month Day Year
Date of employment as "Regular" employee 1 1 2001
Minimum service years 10
1 1 2011

23. A
Solution:

Month Day Year

Date of employment as "Regular" employee 6 1 2001
Date of birth -6 -1 -1951
0 0 50

Age at date of employment

50

Mont
h Day Year

9
Date of employment as "Regular" employee 6 1 2001
Minimun service years 10
6 1 2011

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.”

24. C
Solution:
Month Day Year
Date of employment as "Regular" employee 6 1 2001
Date of birth -9 -1 -1951
-3 0 50

Age at date of employment 49

Mont
Day Year
h
Date of birth 9 1 1951
Normal retirement age 60
Date of retirement 9 1 2011

Mont
Day Year
h
Date of retirement 9 1 2011
Date of employment as "Regular" employee -6 -1 -2001
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.

Month Day Year

Date of retirement 6 1 2011
Birth date -9 -1 -1951
Age at date of retirement -3 0 60

10
 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:
Month Day Year
Date of employment 1 1 1985
Date of birth -12 -31 -1944
-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 age of
20
60
Date of retirement 1 1 2005

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
Solution:

Benefit earned for services rendered in 20x1 50,000

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

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 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

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

Age at date of employment

45

Month Day Year

Date of employment as "Regular" employee 1 1 1990
Service years before reaching the age of 60 15
Date of retirement 1 1 2005

Mont
Day Year
h
Date of retirement 1 1 2005
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%
Multiply by: (Salary level in 2003) 102%

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Multiply by: (Salary level in 2004) 102%

Future salary level - Jan. 1, 2005 31,836

Multiply by: No. of service years 15

Lump sum retirement benefit 477,544

29. C
Solution:
(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

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. B 6. D
2. C 7. D
3. B 8. B
4. C 9. A
5. A 10. A

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PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
PV of defined benefit obligation
  340,000 Jan. 1
Benefits paid 100,000 30,000 Current service cost
34,000 Interest cost
Actuarial gain 60,000  
Dec. 31 244,000

2. A
Solution:
PV of defined benefit obligation
280,000 Jan. 1
Benefits paid 90,000 40,800 Current service cost
39,200 Interest cost
Actuarial gain 60,000
Dec. 31 210,000

3. C
Solution:
Fair value of plan assets
Jan. 1 120,000  
Return on plan assets 40,000 160,000 Benefits paid
Contributions to the fund 280,000
280,000 Dec. 31

4. A
Solution:
Fair value of plan assets
Jan. 1 341,000  
Return on plan assets 51,000 89,000 Benefits paid
Contributions to the fund 32,000
335,000 Dec. 31

5. A

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Solution:
PV of defined benefit obligation
  4,600,000 Jan. 1
Benefits paid 390,000 59,000 Current service cost
460,000 Interest cost
 
Dec. 31 4,729,000

6. B
Solution:
PV of defined benefit obligation
  440,000 Jan. 1
Benefits paid 60,000 148,000 Current service cost
52,800 Interest cost
 
Dec. 31 580,800

7. B
Solution:

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

8. D
Fair value of plan assets
Jan. 1 1,500,000  
Return on plan assets 300,000 300,000 Benefits paid
Contributions to the fund 360,000
1,860,000 Dec. 31

9. B (1,960,000 – 1,520,000) = 440,000

10. A (60,000 – 24,000) = 36,000

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