Polytechnic University of the Philippines ACCOUNTING 101 Chapter 17—Employee Compensation-Payroll, Pensions, & Other Comp

Subject:AccountingPrice:7.87 Bought7

Share With

Polytechnic University of the Philippines ACCOUNTING 101

Chapter 17—Employee Compensation-Payroll, Pensions, & Other Comp. I sues

1. Which of the following accounting principles best describes the rationale for reporting a liability for earned but unused compensated absences?
   1. Historical cost
   2. Full disclosure
   3. Materiality
   4. Matching

 

2. Which of the following criteria is not required for the recognition of a liability for compensated absences under FASB Statement No. 43?
   1. The amount of the obligation must be estimable.
   2. Payment of the obligation must be probable.
   3. Payment of the obligation will require the use of current assets.
   4. The compensation either vests with the employee or can be carried forward to subsequent years.

 

3. Each full-time employee of Sunshine Greenhouse is entitled to ten paid sick days each year. The sick pay is not vested, but any unused sick days can be carried over to subsequent years. Under FASB Statement No. 43, Sunshine Greenhouse should
   1. recognize sick pay as an expense when actually paid.
   2. recognize an estimated current liability for unused sick pay at the end of each period.
   3. recognize an estimated noncurrent liability for unused sick pay at the end of each period.
   4. accrue or not accrue sick pay based on historical rates of absenteeism.
4. Which of the following taxes is not included in the payroll tax expense of the employer?
   1. State unemployment taxes
   2. Federal unemployment taxes
   3. FICA taxes
   4. Federal income taxes

 

5. Which of the following payroll taxes are paid by the employer?
   1. FICA taxes
   2. Federal unemployment taxes
   3. State unemployment taxes
   4. All of the above

 

6. Which of the following taxes must be paid by both the employee and the employer?
   1. Social security tax (FICA)
   2. State unemployment tax
   3. State withholding tax
   4. Federal unemployment tax

 

7. Laid Back Corp. follows the practice of paying all employees for vacation. The vacation pay is not vested, but it carries over for one year if unused. Under GAAP, the obligation for earned but unused vacation should be
   1. accrued as a current liability.
   2. disclosed as a contingent liability.
   3. ignored until incurred.
   4. accrued or not accrued according to the judgment of management.
8. Which of the following statements characterizes defined contribution plans?
   1. They are more complex in construction than defined benefit plans.
   2. The employer's obligation is satisfied by making the appropriate amount of periodic con- tribution.
   3. The investment risk is borne by the employer.
   4. Contributions are made in equal amounts by employer and employees.
9. Which of the following statements characterizes defined benefit plans?
   1. They are comparatively simple in construction and raise few accounting issues for em- ployers.
   2. Retirement benefits are based on the plan's benefit formula.
   3. Retirement benefits depend on how well pension fund assets have been managed.
   4. All of the above.

 

10. Which of the following is not an issue in accounting for defined benefit plans?
    1. The amount of pension expense to be recognized
    2. The amount of pension liability to be reported
    3. The amount of funding (contributions) required by the plan
    4. Disclosures needed to supplement the financial statements
11. FASB Statement No. 87 included the concept of a minimum pension liability requiring an em- ployer to recognize a liability at least equal to the
    1. unfunded accumulated benefit obligation.
    2. unfunded projected benefit obligation.
    3. fair value of pension plan assets.
    4. accrued pension costs.

 

12. When the value of the pension fund assets is greater than the projected benefit obligation, the dif- ference is
    1. reported as prepaid pension cost.
    2. reported as deferred pension cost.
    3. reported as a contra equity adjustment.
    4. not recognized on the balance sheet.

 

 

 

13. The FASB established the minimum liability requirement to reflect
    1. the accumulated benefit obligation.
    2. the vested benefit obligation.
    3. overdue employer contributions.
    4. unfunded pension cost.

 

14. What is measured by the accumulated benefit obligation?
    1. The pension expense, computed by the plan formula applied to years of service to date, as- suming future salary levels.
    2. The pension expense, computed by the plan formula applied to years of service to date, us- ing existing salary levels.
    3. The pension obligation, computed by the plan formula applied to years of service to date, assuming future salary levels.
    4. The pension obligation, computed by the plan formula applied to years of service to date, using existing salary levels.

 

15. Under FASB Statement No. 87, the minimum liability is computed using the difference between the
    1. accumulated benefit obligation and the fair value of plan assets.
    2. net periodic pension cost and the current period contribution.
    3. fair value of plan assets and the market-related value of plan assets.
    4. projected benefit obligation and the market-related value of plan assets.
16. If the actual return on pension fund assets exceeds the expected return for the period, the differ- ence is
    1. a deferred loss.
    2. a deferred gain.
    3. recognized as a loss in the current period.
    4. recognized as a gain in the current perio
17. The projected benefit obligation is the measure of pension obligation that
    1. can no longer be used under GAAP as an estimate for reporting the service cost compon- ent of pension expense.
    2. is not an allowable estimate for reporting the service cost component of pension expense for defined benefit plans.
    3. is one of several allowable estimates for reporting the service cost component of pension expense.
    4. is the only allowable estimate for reporting the service cost component of pension ex- pense.

 

18. FASB Statement No. 87 states that prior service cost should be
    1. offset against current service cost.
    2. recognized in the period of plan adoption or amendment.
    3. amortized over the expected service period.
    4. recorded as a prior period adjustment.

 

19. Which of the following is not a component of net periodic pension cost?
    1. Interest cost
    2. Actual return on plan assets
    3. Benefits paid to retirees
    4. Amortization of prior service cost
20. The FASB's conclusion relating to the computation of the service cost component of pension ex- pense is that
    1. the projected benefit obligation computed using future salary levels provides a reasonable measure of present pension obligation and expense.
    2. the projected benefit obligation computed using present salary levels provides a reasonable measure of present pension obligation and expense.
    3. the projected benefit obligation computed using present salary levels provides a reasonable measure of future pension obligation and expense.
    4. the projected benefit obligation computed using future salary levels provides a reasonable measure of future pension obligation and expense.

 

21. FASB Statement No. 132 requires that the notes accompanying the financial statements include a schedule reconciling the
    1. funded status of the plan with amounts reported in the balance sheet.
    2. current period employer contributions with pension expense reported in the income state- ment.
    3. projected benefit obligation and the accumulated benefit obligation.
    4. actual return on plan assets with the expected return.
22. The vested benefits of an employee in a pension plan represent benefits
    1. to be paid to the retired employee in the current year.
    2. to be paid to the retired employee in subsequent years.
    3. to be paid from funds currently in the hands of an independent trustee.
    4. that are not contingent on the employee's continuing in the service of the employer.
23. Which of the following components should be included in the calculation of net pension cost re- cognized for a period by an employer sponsoring a defined benefit pension plan?

 

Actual Return on Plan Assets, If Any	Amortization of Unrecognized Prior Service cost, If Any	Interest Cost
a.            No	No	Yes
b.            Yes	No	Yes
c.             Yes	Yes	No
d.            Yes	Yes	Yes

 

24. Which of the following concepts for postretirement benefit plans is comparable to the projected benefit obligation (PBO) of pension plans?
    1. Accumulated Postretirement Benefit Obligation (APBO)
    2. Expected Postretirement Benefit Obligation (EPBO)
    3. Actual return on plan assets
    4. Expected return on plan assets
25. Which of the following statements is correct?
    1. Minimum (corridor) amortization of net unrecognized gain or loss is not allowed for postretirement benefit plans.
    2. Immediate recognition of gains and losses is allowed for postretirement benefit plans but not for pension plans.
    3. Immediate recognition of gains and losses is allowed for pension plans but not for postretirement benefit plans.
    4. Minimum (corridor) amortization of net unrecognized gain or loss is the only amortization method allowed for postretirement benefit plans.

 

26. The interest cost component for other postretirement benefits is determined using
    1. the settlement rate of interest.
    2. the rate of return on high quality fixed-income investments with cash flows matching the timing and amounts of expected benefit payments.
    3. both a and b.
    4. neither a or b.
27. International accounting standards for pension currently in effect
    1. allow both the accrued benefit and projected benefit methods.
    2. allow only the accrued benefit method.
    3. allow only the projected benefit method.
    4. do not allow either the accrued benefit or projected benefit methods.
28. Which of the following is not correct?
    1. International accounting standards for pensions (IFRS 19) do not include any provisions for the recognition of an additional minimum liability.
    2. International accounting standards for pensions (IFRS 19) do not allow for the recognition of a net pension asset in some circumstances.
    3. International accounting standard for pensions (IFRS 19) include the same 10% corridor amount in calculating the amortization of deferred gains and losses as found in U.S. GAAP.
    4. International accounting standards for pensions (IFRS 19) recognized pension gains and losses immediately as part of comprehensive income.

 

29. Wright, Inc. has an incentive compensation plan under which the sales manager receives a bonus equal to 10 percent of the company's income after deductions for bonus and income taxes. In- come before bonus and income taxes is $400,000. The effective income tax rate is 30 percent. How much is the bonus (rounded to the nearest dollar)?

a.    $40,000

b.   $30,108

c.    $28,000

d.   $26,168

 

30. Washington Corporation provides an incentive compensation plan under which its president is to receive a bonus equal to 10 percent of Washington's income in excess of $100,000 before deduct- ing income tax but after deducting bonus. If income before income tax and bonus is $320,000 and the effective tax rate is 40 percent, the amount of the bonus should be

a.    $20,000.

b.   $22,000.

c.    $32,000.

d.   $44,000.

 

31. During the first week of January, Sam Jones earned $200. Assume that FICA taxes are 7.65 per- cent of wages up to $50,000, state unemployment tax is 5.0 percent of wages up to $13,000, and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Sam has voluntary withholdings of $10 (in addition to taxes) and that federal and state income tax withholdings are

$18 and $6, respectively. What amount is the check, net of all deductions, that Sam received for the week's pay?

a.    $150.70

b.   $141.70

c.    $140.10

d.   $155.20

 

32. During the first week of January, Sam Jones earned $200. Assume that FICA taxes are 7.65 per- cent of wages up to $50,000, state unemployment tax is 5.0 percent of wages up to $13,000, and federal unemployment tax is 0.8 percent of wages up to $13,000. Assume that Sam has voluntary withholdings of $10 (in addition to taxes) and that federal and state income tax withholdings are

$18 and $6, respectively. What is the employer's payroll tax expense for the week, assuming that Sam Jones is the only employee?

a.    $6.32

b.   $26.90

c.    $10.00

d.   $19.05

 

33. Northwest Company determined that it has an obligation relating to employees' rights to receive compensation for future absences attributable to employees services already rendered. The oblig- ation relates to rights that vest, and payment of the compensation is probable. The amounts of Northwest's obligations as of December 31 are reasonably estimated as follows:

 

Vacation pay .........................................                                                                                                      $110,000

Sick pay .............................................                                                                                                               80,000

 

In its December 31 balance sheet, what amount should Northwest report as its liability for com- pensated absences?

1. 1. $0

b. $80,000

c.    $110,000

d.   $190,000

 

34. The following information relates to the defined benefit pension plan for the McDonald Company for the year ending December 31, 2005.

 

Projected benefit obligation, January 1 ...............	$4,600,000
Projected benefit 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
Expected return on plan assets ........................	450,000
Amortization of deferred gain .........................	32,500
Employer contributions ................................	425,000
Benefits paid to retirees .............................	390,000
Settlement rate .......................................	10%
Service cost for the year would be a.      $59,000. b.   $94,000. c.     $129,000. d.   $390,000.

 

35. The following information relates to the defined benefit pension plan of the McDonald Company for the year ending December 31, 2005:

Projected benefit obligation, January 1 ............... $4,600,000 Projected benefit 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

Expected return on plan assets ........................                                                                                         450,000

Amortization of deferred gain .........................                                                                                             32,500

Employer contributions ................................                                                                                              425,000

Benefits paid to retirees .............................                                                                                                390,000

Settlement rate .......................................                                                                                                                10%

 

The actual return on plan assets for the year is a.        $105,000.

b.   $495,000.

c.    $503,500.

d.   $530,000.

 

36. The following information relates to Irasly Inc. at December 31, 2005:

Fair value of plan assets .............................                                                                                         $1,520,000

Market related asset value ............................                                                                                        1,440,000

Accumulated benefit obligation ........................                                                                                   1,960,000

Projected benefit obligation ..........................                                                                                       2,040,000

Unrecognized prior service cost .......................                                                                                           24,000

Prepaid/accrued pension cost ..........................                                                                                                        0

 

The total pension liability at December 31, 2005, for Irasly Inc. is

a.    $0.

b.   $440,000.

c.    $480,000.

d.   $520,000.

 

37. On January 1, 2005, Cubs Corporation adopted a defined benefit pension plan. The plan's service cost of $150,000 was fully funded at the end of 2005. Prior service cost was funded by a contri- bution of $60,000 in 2005. Amortization of prior service cost was $24,000 for 2005. What is the amount of Cub's prepaid pension cost at December 31, 2005?

a.    $36,000

b.   $60,000

c.    $84,000

d.   $90,000

 

38. The following information relates to the defined benefit pension plan of the McDonald Company for the year ending December 31, 2005:

 

Projected benefit obligation, January 1 ...............	$4,600,000
Projected benefit 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
Expected return on plan assets ........................	450,000
Amortization of deferred gain .........................	32,500
Employer contributions ................................	425,000
Benefits paid to retirees .............................	390,000
Settlement rate .......................................	10%

 

The net amount of the gain or loss component to be included in pension cost for 2005 would be

 a.    $77,500.

b.   $47,500.

c.    $32,500.

d.   $12,500.

 

39. On January 1, 2005, Crowther Co. estimated a projected benefit of $440,000 based on a settle- ment rate of 12 percent. Pension benefits paid to retirees totaled $60,000. Service costs for 2005 amounted to $148,000. The fair value of the plan assets were $350,000 and $400,000 on Decem- ber 31, 2004, and December 31, 2005, respectively. The projected benefit obligation at December 31, 2005, was

a.    $528,000.

b.   $580,800.

c.    $630,800.

d.   $640,800.

 

40. Chester Company has a defined benefit plan. The fair value of plan assets on January 1, 2005, was $1,500,000. No unrecognized net loss or gain existed. On December 31, 2005, the fair value of the plan assets was $1,860,000. Benefits paid to retirees equaled $300,000. Company contribu- tions to the plan totaled $360,000. The settlement rate was 8 percent, and the expected long-term rate of return on plan assets was 10 percent. The actual return on plan assets was

a.    $150,000.

b.   $180,000.

c.    $224,000.

d.   $300,000.

 

41. Trueblu Corporation is a publicly held company that supplies tourniquets to medical emergency centers. The company maintains a noncontributory defined benefit pension plan for its employ- ees. The Trueblu's actuary has provided the following information for the year ended December 31, 2005:

 

Projected benefit obligation ..........................	$800,000
Accumulated benefit obligation ........................	700,000
Fair value of plan assets .............................	820,000
Service cost ..........................................	240,000
Interest on projected benefit obligation ..............	24,000
Amortization of unrecognized prior service cost .......	60,000
Expected and actual return on plan assets .............	82,000

 

Prior contributions to the defined benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. If no contributions have been made for 2005 pension cost, what amount should Trueblu report in its December 31, 2005 balance sheet for accrued pension cost?

a.    $218,000

b.   $242,000

c.    $324,000

d.   $406,000

 

42. On January 1, 2005, Dibble Co. amended its defined benefit plan resulting in an increase in the projected benefit obligation of $700,000. As of the date of the amendment, Dibble Co. had 100 employees. Ten employees are expected to leave at the end of each of the next ten years. The minimum amount of amortization for prior service cost in 2006 (second year) is:

a.    $140,000.

b.   $127,273.

c.    $114,545.

d.   $101,818.

 

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

Projected benefit obligation, January 1, 2005 ......... Fair value of plan assets, market-related asset value,	$10,000,000
January 1, 2005 .......................................	10,400,000
Service cost--2005 ....................................	800,000
Actual return on plan assets--2005 ....................	900,000
Settlement rate .......................................	10%
Long-term rate of return on assets ....................	8%

 

There was no unrecognized prior service cost or unrecognized gains or losses. Flash's net periodic pension cost for the year was

a.    $880,000.

b.   $900,000.

c.    $940,000.

d.   $968,000.

 

44. The following information relates to the defined benefit pension plan of the McDonald Company for the year ending December 31, 2005:

 

Projected benefit obligation, January 1 ............... $4,600,000 Projected benefit 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

Expected return on plan assets ........................                                                                                         450,000

Amortization of deferred gain .........................                                                                                             32,500

Employer contributions ................................                                                                                              425,000

Benefits paid to retirees .............................                                                                                                390,000

Settlement rate .......................................                                                                                                                10%

 

The net periodic pension cost reported in the income statement for 2005 would be a.        $11,500.

b.   $24,000.

c.    $36,500.

d.   $59,000.

 

45. Blaine Inc. shows the following data relating to its pension plan for 2005:

 

Amortization of unrecognized net loss ................. $ 16,000 Amortization of unrecognized prior service cost ....... 28,000 Expected return on plan assets ........................        32,000

Actual return on plan assets .......................... 36,000 Interest on projected benefit obligation ..............   70,000 Service cost ..........................................       160,000

 

What amount should Blaine report for pension expense in 2005? a.        $206,000

b.   $238,000

c.    $242,000

d.   $270,000

 

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

 

	Dec. 2005	Dec. 2006
Prepaid pension cost ......................	$ 200,000	$ 250,000
Fair value of plan assets .................	5,900,000	6,200,000
Market related asset value ................	6,000,000	6,100,000
Accumulated benefit obligation ............	5,500,000	6,400,000
Projected benefit obligation ..............	7,000,000	8,000,000

 

There was no prepaid/accrued pension cost at January 1, 2005. The total pension liability at December 31, 2005, for Sutton is

a.    $0.

b.   $1,200,000.

c.    $1,500,000.

d. $400,000.

 

47. Piston Corporation has the following pension information for the year ended December 31, 2005:

 

Service cost		$ 225,000
Contributions	to the plan	240,000
Actual return	on plan assets	210,000

Projected benefit obligation (beginning of year)                                                                               2,700,000

 

Market-related and fair value of plan assets (beginning of year)

 

1,800,000

 

 

Assuming the expected return on plan assets and the settlement rate are both 10 percent, what amount should Piston report for pension expense for 2005?

a.    $225,000

b.   $285,000

c.    $315,000

d.   $495,000

 

48. Sutton Inc. has a defined benefit plan for its employees. The following information relates to this plan.

 

	Dec. 2005	Dec. 2006
Prepaid pension cost ......................	$ 200,000	$ 250,000
Fair value of plan assets .................	5,900,000	6,200,000
Market related asset value ................	6,000,000	6,100,000
Accumulated benefit obligation ............	5,500,000	6,400,000
Projected benefit obligation ..............	7,000,000	8,000,000

 

There was no prepaid/accrued pension cost at January 1, 2005. The net pension liability at December 31, 2006, for Sutton is

a.    $0.

b.   $200,000.

c.    $300,000.

d. $1,400,000.

 

49. The following information relates to Irasly Inc. at December 31, 2005:

 

Fair value of plan assets .............................                                                                                         $1,520,000

Market related asset value ............................                                                                                        1,440,000

Accumulated benefit obligation ........................                                                                                   1,960,000

Projected benefit obligation ..........................                                                                                       2,040,000

Unrecognized prior service cost .......................                                                                                           24,000

Prepaid/accrued pension cost ..........................                                                                                                        0

 

The intangible asset on Irasly's balance sheet at December 31, 2005, is

a.    $0.

b. $24,000.

c.    $440,000.

d.   $520,000.

 

50. Robinson Company adopted a defined benefit pension plan on January 1, 2005. Robinson amort- izes the prior service cost over 16 years and funds prior service cost by making equal payments to the fund trustee at the end of each of the first ten years. The service cost is fully funded at the end of each year. The following data are available for 2005:

 

Service cost ..........................................                                                                                                      $440,000

Prior service cost:

Amortized ...........................................                                                                                                     166,800

Funded ..............................................                                                                                                       228,800

 

If interest cost for 2005 is equal to the return on plan assets, then Robinson's prepaid pension cost at December 31, 2005, is

a.    $0.

b. $62,000.

c.    $166,800.

d.   $228,800.