Accounting 22 Intermediate Accounting 2

Accounting for Pension

PROBLEM No. 1 – Pension Liability

Calder, Inc. is a manufacturing company with 50 employees. Recently, after a long negotiation with the local union, the
company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2010.
Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by
accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a
discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller
develops the following information related to the pension plan.

Average length of time to retirement 15 years

Expected life duration after retirement 10 years
Total pension payment expected each year after retirement for
all employees. Payment made at the end of each year. P 800,000 per year

The interest rate to be used is 8%.

1. On the basis of the information above, determine the present value of the pension liability.

PROBLEM No. 2 – Pension Funding

Jean Hanore, the owner of Attic Angels, has hired you as a benefit consultant. She wants to establish a retirement plan for
herself and her three employees. Jean has provided the following information: The plan is to be based upon annual salary
for the last year before retirement and is to provide 50% of Jean’s last-year annual salary and 40% of the last-year annual
salary of each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of
retirement. Jean wishes to fund the plan by making 15 annual deposits beginning January 1, 2010. Invested funds will
earn 12% compounded annually. Information about the plan participants as of January 1, 2010, is as follows.

Current Annual Estimated

Name Position Salary Retirement Date
Jean Hanore Owner 48,000 January 01, 2035
Colin Davis Flower arranger 36,000 January 01, 2040
Anita Baker Sales Clerk 18,000 January 01, 2030
Gavin Bryars Part-time bookkeeper 15,000 January 01, 2025

In the past, Jean has given herself and each employee a year-end salary increase of 4%. Jean plans to continue this
policy in the future. Round all answer to the nearest peso.

2. Based upon the above information, what will be the annual retirement benefit for each plan participant?
3. What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid?
4. What is the amount of each annual deposit Jean must make to the retirement plan?

PROBLEM No. 3 – Amended IAS 19 Single Year

Empire 2 Company sponsors a define benefit pension plan accounted under IAS 19 revised. The corporation’s actuary
provides the following information about the plan.

1/1/14 12/31/14
Vested benefit obligation 1,500 1,900
Defined benefit obligation 2,800 3,645
Plan assets (fair value) 1,700 2,620
Discount rate and expected rate of return 10%
Pension asset/liability 1,100 ?
Service cost for the year 2013 400
Contributions (funding in 2013) 800
Benefits paid in 2013 200

5. Compute the pension expense to be reported in profit or loss for 2014.

6. Compute the remeasurement net gain or loss to be reported in OCI for 2014.
7. Compute the unrecognized actuarial gain or loss for 2014.
8. Compute the funded status as of December 31, 2014.
9. Compute the plan asset or liability as of December 31, 2014.

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 Accounting 22 Intermediate Accounting 2
Accounting for Pension

PROBLEM No. 4 – Amended IAS 19 Multiple Years

Patie Afternoon adopts IAS 19 revised as early as January 1, 2012 in accounting for its defined benefit pension plan on
January 1, 2012, with the following beginning balances: plan assets P200,000; defined benefit obligation P200,000. Other
data relating to 3 years’ operation of the plan are as follows:

2012 2013 2014

Annual service cost 16,000 19,000 26,000
Discount rate and expected rate of return 10% 10% 10%
Actual return on plan assets 17,000 21,900 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Past service cost - not yet vested immediately (plan amended, 1/1/13) 160,000
Change in actuarial assumptions establishes a December 31, 2014 defined benefit 520,000
obligation of:

Before the revision on IAS 19, the company used the corridor approach.

10. Compute the pension expense to be reported in profit or loss for 2012.
11. Compute the pension asset or liability, adjusted, as of January 1, 2013.
12. Compute the pension expense to be reported in profit or loss for 2013.
13. Compute the pension expense to be reported in profit or loss for 2014.
14. Compute the pension asset or liability as of December 31, 2014.

PROBLEM No. 5 – IAS 19 Single Year

Empire 1 Company sponsors a define benefit pension plan. The corporation’s actuary provides the following information
about the plan.

1/1/13 12/31/13
Vested benefit obligation 1,500 1,900
Defined benefit obligation 2,800 3,645
Plan assets (fair value) 1,700 2,620
Discount rate and expected rate of return 10%
Pension asset/liability ?
Unrecognized past service cost 1,100 ?
Service cost for the year 2013 400
Contributions (funding in 2013) 800
Benefits paid in 2013 200

The average remaining service life per employee is 20 years. The average time to vesting past service costs is 10 years.

15. Compute the actual return on the plan assets in 2013.

16. Compute the amount of the unrecognized net gain or loss as of December 31, 2013. (Assume the January 1, 2013
balance was zero.)
17. Compute the amount of unrecognized net gain or loss amortization for 2013 (corridor approach).
18. Compute the amount of past service cost amortization for 2013.
19. Compute the pension expense for 2013.

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 Accounting 22 Intermediate Accounting 2
Accounting for Pension

PROBLEM No. 6 – IAS 19 Deferred Recognition of Actuarial Gains and Losses

Patie Night adopts IAS 19 (corridor approach) in accounting for its defined benefit pension plan on January 1, 2012, with
the following beginning balances: plan assets P200,000; defined benefit obligation P200,000. Other data relating to 3
years’ operation of the plan are as follows:

2012 2013 2014

Annual service cost 16,000 19,000 26,000
Discount rate and expected rate of return 10% 10% 10%
Actual return on plan assets 17,000 21,900 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Unrecognized past service cost (plan amended, 1/1/13) 160,000
Amortization of unrecognized past service cost 54,400 41,600
Change in actuarial assumptions establishes a December 31, 2014 defined benefit 520,000
obligation of:

20. Compute the pension expense to be reporting in profit or loss for 2012.
21. Compute the pension expense to be reporting in profit or loss for 2013.
22. Compute the pension expense to be reporting in profit or loss for 2014.
23. Compute the pension funded status as of December 31, 2014.
24. Compute the pension asset or liability as of December 31, 2014.

PROBLEM No. 7 – IAS 19 Immediate Recognition of Actuarial Gains and Losses in OCI
Patie Day adopts IAS 19 (immediate recognition through OCI approach) in accounting for its defined benefit pension plan
on January 1, 2012, with the following beginning balances: plan assets P200,000; defined benefit obligation P200,000.
Other data relating to 3 years ’operation of the plan are as follows:

2012 2013 2014

Annual service cost 16,000 19,000 26,000
Discount rate and expected rate of return 10% 10% 10%
Actual return on plan assets 17,000 21,900 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Unrecognized past service cost (plan amended, 1/1/13) 160,000
Amortization of unrecognized past service cost 54,400 41,600
Change in actuarial assumptions establishes a December 31, 2014 defined benefit 520,000
obligation of:

25. Compute the pension expense to be reported in profit or loss for 2012.
26. Compute the pension expense to be reported in profit or loss for 2013.
27. Compute the pension expense to be reported in profit or loss for 2014.
28. Compute the pension funded status as of December 31, 2014.
29. Compute the pension asset or liability as of December 31, 2014.

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 Accounting 22 Intermediate Accounting 2
Accounting for Pension

PROBLEM No. 8 – IAS 19 Immediate Recognition of Actuarial Gains and Losses in P/L
Patie Midnight adopts IAS 19 (immediate recognition through P/L approach) in accounting for its defined benefit pension
plan on January 1, 2012, with the following beginning balances: plan assets P200,000; defined benefit obligation
P200,000. Other data relating to 3 years’ operation of the plan are as follows:

2012 2013 2014

Annual service cost 16,000 19,000 26,000
Discount rate and expected rate of return 10% 10% 10%
Actual return on plan assets 17,000 21,900 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Past service cost - vested immediately (plan amended, 1/1/13) 160,000
Change in actuarial assumptions establishes a December 31, 2014 defined benefit 520,000
obligation of:

30. Compute the pension expense to be reported in profit or loss for 2012.
31. Compute the pension expense to be reported in profit or loss for 2013.
32. Compute the pension expense to be reported in profit or loss for 2014.
33. Compute the pension funded status as of December 31, 2014.
34. Compute the pension asset or liability as of December 31, 2014.

PROBLEM No. 9 – Ethics

Tim Buhl, newly appointed controller of STL, is considering ways to reduce his company’s expenditures on annual
pension costs. One ways to do this is to switch STL’s pension fund assets from First Security to NET Life. STL is a very
well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance fro the
first time in its 25-year history. Despite financial problems, STL still committed to providing its employees with good
pension and post-retirement health benefits.

Under its present plan with First Security, STL is obligated to pay P43 million to meet the expected value of future pension
benefits that are payable to employees as an annuity upon their retirement from the company. On the other hand, NET
Life requires STL to pay only P35 million for identical future pension benefits. First Security is one of the oldest and most
reputable insurance companies in the Philippines. NET Life has much weaker reputation in the insurance industry. In
pondering the significant difference in annual pension costs, Bhul asks himself, “Is this too good to be true?”

35. Why might NET Life’s pension cost requirement be P8 million less that First Security’s requirement for the same future
value?
36. What ethical issues should Tim Buhl consider before switching STL’s pension fund assets?
37. Who are the stakeholders that could be affected by Buhl decision?

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