Chapter 6 Employee Benefits 2 PDF

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Chapter 6Employee Benefits (Part 2)PROBLEM 1: TRUE OR FALSE TRUE 6. TRUE FALSE 7. TRUE TRUE 8. FALSE TRUE 9. TRUE TRUE 10. FALSE PROBLEM 2: FOR CLASSROOM DISCUSSION B ####### 2. E####### 3. A####### 4. B####### 5. D####### 6. B####### 7. C8. Solution: PV of defined benefit obligation200,000 Jan. 1 B...

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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 Benefits 60,000 40,000 paid 24,000

30,000 Dec. 31 9.

Jan. 1 Current service cost Interest cost (200K x 12%)

Actuarial loss

234,000

Solution: Fair value of plan assets

Jan. 1 Return on plan assets

Contributions to the fund

240,00 0 20,00 0 220,00

1

60,00 0

Benefits paid

0 420,00 0

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 Benefits paid

75,000

Actuarial gain

10,000

Dec. 31

2,381,000

1,800,000 450,000 216,000

Jan. 1 Current service cost Interest cost

Fair value of plan assets Jan. 1 Return on plan assets

Contributions to the fund

1,500,00 0 180,00 0 45,00 0

75,00 0

Benefits paid

1,650,00 0

Dec. 31

Present value of defined benefit obligation, Dec. 31 Fair value of plan assets, Dec. 31

2,381,000 1,650,000

Deficit - Net defined benefit liability - Dec. 31

11. Solution: Service cost:

2

731,000

(a) Current service cost (b) Past service cost (c) (Gain) or loss on settlement

400,000 200,000 40,000 640,000

Net interest on the net defined benefit liability (asset): (a) Interest cost on the defined benefit obligation (1.6M x 10%) (b) Interest income on plan assets (1.4M x 10%) (c) Interest on the effect of the asset ceiling Defined benefit cost recognized in profit or loss

Remeasurements of the net defined benefit liability (asset): (a) Actuarial loss (b) Difference between interest income on plan assets and return on plan assets (140,000 - 90,000) (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 Total defined benefit cost

160,000 (140,000) 20,000 660,000

10,000 50,000 60,000 720,000

3

PROBLEM 3: EXERCISES 1.

Solution:

Benefits paid Actuarial gain Dec. 31

2.

PV of defined benefit obligation 280,000 Jan. 1 120,000 50,000 Current service cost 30,800 Interest cost 50,000 190,800

Solution:

Benefits paid

PV of defined benefit obligation 130,000 Jan. 1 110,000 25,000 Current service cost 15,600 Interest cost

50,000 Dec. 31

3.

Actuarial loss

110,600

Solution: Fair value of plan assets

Jan. 1 Return on plan assets

Contributions to the fund

4.

360,00 0 80,00 0 480,00 0

120,00 0

Benefits paid

800,00 0

Dec. 31

Solution: Fair value of plan assets

Jan. 1 Return on plan assets

Contributions to the fund

234,00 0 24,00 0 120,00 0

4

79,00 0

Benefits paid

299,00 0

Dec. 31

5.

Solution:

Service cost: (a) Current service cost (b) Past service cost (c) (Gain) or loss on settlement

600,000 300,000 (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%) (b) Interest income on plan assets (2.1M x 12%) (c) Interest on the effect of the asset ceiling Defined benefit cost recognized in profit or loss

Remeasurements of the net defined benefit liability (asset): (a) Actuarial (gains) and losses (b) Difference between interest income on plan assets and return on plan assets (252K - 270K) (c) Difference between the interest on the effect of the asset ceiling and the change in the effect of the asset ceiling

288,000 (252,000) 36,000 876,000

(15,000) (18,000) -

Defined benefit cost recognized in OCI

(33,000)

Total defined benefit cost

843,000

5

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 * 646,794 Actuarial loss Actuarial gain 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 Jan. 1 Return on plan assets

Contributions to the fund

1,176,73 2 11,672

-

474,934 1,663,33 8

3.

Benefits paid

Dec. 31

Solution:

Present value of defined benefit obligation (DBO) Fair value of plan assets (FVPA) Net defined benefit liability – Deficit

20x1 4,488,29 4 1,663,33 8 2,824,95 6

4. Solution: Service cost: (a) Current service cost (b) Past service cost (c) (Gain) or loss on settlement

20x0 4,645,54 1 1,176,73 2 3,468,80 9

239,152 239,152

Net interest on the net defined benefit liability (asset): (a) Interest cost on the defined benefit obligation (b) Interest income on plan assets (given) (c) Interest on the effect of the asset ceiling

250,395 (77,179) 173,216

6

Defined benefit cost recognized in profit or loss

412,368

Remeasurements of the net defined benefit liability (asset): (a) Actuarial (gains) and losses (b) Difference between interest income on plan assets and return on plan assets (77,179 - 11,672) (c) Difference between the interest on the effect of the asset ceiling and the change in the effect of the asset ceiling

(646,794) 65,507

Defined benefit cost recognized in OCI

(581,287)

Total defined benefit cost

(168,919)

5. Solution: Net defined benefit liability (asset) - Jan. 1, 20x1 Contributions Defined benefit cost Net defined benefit liability (asset) - Dec. 31, 20x1

6.

3,468,809 (474,934) (168,919) 2,824,956

Solution:

Dec. 31, 20x1

Net defined benefit liability (squeeze)

Retirement benefits expense Remeasurement of defined benefit pension plan Cash (contributions)

643,85 3 412,36 8

581,287 474,934

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

7

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

65 38 103 2 51.5

13. D Answer: 4 employees (3 + 1) (see highlighted numbers below. STATISTICAL DISTRIBUTION OF ELIGIBLE MEMBERS AS OF DEC. 31, 20X1 AGE

20 & below 21 25 26 30 31 35 36 40 41 45 46 50 51 55 56 60 61 65 66 & above TOTAL

less than 5 yrs.

5 but less than 10

10 but less than 15

15 but less than 20

20 years & above

1

TOTA L

1 -

1

1

2

1

1 1

1

1 1

1 1

2 1

1

1

9

4

1

3

-

14. D ABC’s retirement policy:

8

“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 16. D 17. B 18. D 19. D

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

21. D Solution: Mont h 8

Date of birth Normal retirement age

Day

8

Date of retirement

Year

14

1980 60

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: Mont h Date of employment as "Regular" employee Minimum service years

Day

Year

1

1

2001

1

1

2011

Day

Year

10

23. A Solution: Month Date of employment as "Regular" employee Date of birth

6 -6 0

9

1 -1 0

2001 -1951 50

Age at date of employment

50 Mont h

Date of employment as "Regular" employee Minimun service years

Day

Year

6

1

6

1

2001 10 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 Date of employment as "Regular" employee Date of birth

Day

Year

1 -1 0

2001 -1951 50

6 -9 -3

Age at date of employment

49 Mont h 9

Date of birth Normal retirement age Date of retirement

Day 1

9 Mont h 9

Date of retirement Date of employment as "Regular" employee

Service years

1 Day

10

1951 60 2011 Year

1

2011

-6

-1

-2001

3

0

10

10 yrs. and 3 mos.

No. of service years

Year

Choice (a) is incorrect because, on June 1, 2011, Ms. Munda has not yet reached the age of 60. Month 6 -9

Date of retirement Birth date

Day

-3

Age at date of retirement

1 -1

Year 2011 -1951

0

60

59 yrs. and 3 months

Age on June 1, 2011

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 1 -12 -11

Date of employment Date of birth

Age at date of employment

Day

Year 1985 -1944 41

1 -31 -30

40

Date of employment No. of service years before reaching the age of 60

Mont h 1

Year

1

1985 20

1

Date of retirement

Day

1

2005

26. B Solution: Final monthly salary level (600K ÷ 12) Multiply by: Service years

50,000

Lump sum retirement benefit

1,000,000

11

20

27. C Solution:

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 1 -12 -11

Expected normal retirement date End of reporting period

No. of years before retirement

Day

Year 2005 -2001 4

1 -31 -30

3

28. B Solution: Month Date of employment as "Regular" employee Date of birth

Age at date of retirement

Day 1

Age at date of employment

Year

1

1990

-12

-31

-1944

-11

-30

46

45 Mont h

Date of employment as "Regular" employee Service years before reaching the age of 60

1

12

Year 1

1990 15

1

Date of retirement

Day

1

2005

Mont h 1

Date of retirement End of current reporting period

-12 -11

No. of years before retirement

3

Day

Year 1

2005

-31 -30

-2001 4

Current salary level - Dec. 31, 2001 Multiply by: (Salary level in 2002) Multiply by: (Salary level in 2003) Multiply by: (Salary level in 2004)

30,000 102% 102% 102%

Future salary level - Jan. 1, 2005 Multiply by: No. of service years

31,836

Lump sum retirement benefit

477,544

15

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 1 -7 -6

Day 1 -1 0

Year 2002 -1990 12

13

Years of service Percentage of benefit (see 'OUTLINE OF BASIC PLAN PROVISIONS' #8)

11.5 55%

Final monthly salary level (240K ÷ 12) Multiply by: Years of service Multiply by: Percentage of benefit

20,000

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

14

11.5 55%

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL 1. B Solution: PV of defined benefit obligation 340,000 Benefits paid 100,000 30,000 34,000 Actuarial gain 60,000 Dec. 31 244,000

Jan. 1 Current service cost Interest cost

2. A Solution:

Benefits paid

PV of defined benefit obligation 280,000 Jan. 1 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 Return on plan assets

Contributions to the fund

120,00 0 40,00 0 280,00 0

160,00 0

Benefits paid

280,00 0

Dec. 31

4. A Solution:

Fair value of plan assets Jan. 1 Return on plan assets

Contributions to the fund

341,00 0 51,00 0 32,00 0

15

89,00 0

Benefits paid

335,00

Dec. 31

0

5. A Solution: PV of defined benefit obligation Benefits paid

390,000

Dec. 31

4,729,000

4,600,000 59,000 460,000

Jan. 1 Current service cost Interest cost

6. B Solution: PV of defined benefit obligation 440,000 148,00 Benefits paid 60,000 0 52,800 Dec. 31

Jan. 1 Current service cost Interest cost

580,800

7. B Solution:

Fair value of plan assets Jan. 1 Return on plan assets

Contributions to the fund

8.

5,035,00 0 495,00 0 425,00 0

D

16

390,00 0

Benefits paid

5,565,00 0

Dec. 31

Fair value of plan assets Jan. 1

1,500,00 0

Return on plan assets

300,000

Contributions to the fund

360,00 0

9.

B (1,960,000 – 1,520,000) = 440,000

10. A (60,000 – 24,000) = 36,000

17

300,00 0

Benefits paid

1,860,00 0

Dec. 31...