SOL. MAN. Chapter 6 Employee Benefits (PART 2) 2021 PDF

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Chapter 6Employee Benefits (Part 2)PROBLEM 1: TRUE OR FALSE 1 2 3 4 5 6 – only the net defined benefit liability (asset) is recognized in the accounts and in the financial statements. The PV of DBO is disclosed only. 7 8 9 10PROBLEM 2: MULTIPLE CHOICE – THEORY B D A B A D C – the event is “curtailme...

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Chapter 6 Employee Benefits (Part 2) PROBLEM 1: TRUE OR FALSE 1.TRUE 2.FALSE 3.TRUE 4.FALSE 5.TRUE 6.FALSE – only the net defined benefit liability (asset) is recognized in the accounts and in the financial statements. The PV of DBO is disclosed only. 7.FALSE 8.TRUE 9.TRUE 10.TRUE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. B 2. D 3. A 4. B 5. A 6. D 7. C – the event is “curtailment,” which results in past service cost. Past service cost can be either positive (increase in PV of DBO) or negative (decrease in PV of DBO). In the problem, it is the latter case. Choice (a) is correct. The termination benefits paid to the terminated employees increase the termination benefits expense for the period. Choice (b) is correct (see discussion above). Choice (d) is correct. A decrease in PV of DBO either decreases the net defined benefit liability or increases the net defined benefit asset. 8. C

Page | 2 Side note: The IASB opined that “early retirements” are accounted for as post-employment benefits rather than termination benefits because the benefits pertain to employee service rather than the employer’s act of terminating the employee. 9. D 10. D PROBLEM 3: EXERCISE Requirement (a): Fair value of plan assets Jan. 1 2,100,000 Benefits Return on plan assets 270,000 450,000 paid Contributions to the 480,000 fund 2,400,0 Dec. 31 00

Benefits paid Actuarial gain Dec. 31

PV of defined benefit obligation 2,400, Jan. 1 000 450, 600, Current service 000 000 cost 300,000 Past service cost 15, 288, Interest cost 000 000 3,12 3,000

FVPA PV of DBO Net defined benefit liability

Jan. 1, 20x1 2,100, 000 2,400, 000 (30 0,000)

Dec. 31, 20x1 2,400, 000 3,123, 000 (72 3,000)

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

600,000 300,000 900,000

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

288,000 (252,000) 36,000 936,000

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 Defined benefit cost recognized in OCI

(18,000)

Total defined benefit cost

903,000

Requirement (c): 20 Net defined benefit liability x1 Cash

to record the defined benefit cost

(33,000)

480,00 0

fund

Retirement benefits expense Remeasurement of def. benefit liab. Net defined benefit liability

-

480,000

to record the contributions to the De c. 31, 20 x1

(15,000)

936,000 33,000 903,00 0

Page | 4 Requirement (d): Report form: Net defined benefit liability, beg. Contributions to the fund Defined benefit cost Net defined benefit liability, end.

300,00 0 (480,000 ) 903,00 0 723,0 00

OR T-account form: Net defined benefit liability 300,000 Contributions to the fund Dec. 31

480,0 00 723,0 00

903,000

Jan. 1 Defined benefit cost

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. C Fair value of plan assets Jan. 1 360,000 Benefits Return on plan assets 80,000 120,000 paid Contributions to the 480,000 fund 800,00 Dec. 31 0 2. B Jan. 1 Return on plan assets Contributions to the fund

Fair value of plan assets 234,000 Benefits 24,000 79,000 paid 120,000

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299,000

Dec. 31

3. C PV of defined benefit obligation 280,0 Jan. 1 00 120,0 50,0 Current service 00 00 cost 30,8 Interest cost 00 50,0 00 190, 800

Benefits paid

Actuarial gain Dec. 31

4. A

Benefits paid

Dec. 31

PV of defined benefit obligation 130,0 Jan. 1 00 110,0 25,0 Current service 00 cost 00 15,6 Interest cost 00 50,00 Actuarial loss 0 110,6 00

5. A Fair value of plan assets Jan. 1 Return on plan assets Contributions to the fund

960,000 70,000

290,000

Benefits paid

1,100,0 00

Dec. 31

360,000

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Benefits paid

PV of defined benefit obligation 1,200,0 Jan. 1 00 290,000 260,000 Current service cost

Actuarial gain

28,000

Dec. 31

1,250,0 00

108,000

Interest cost

Jan. 1, 20x1 FVPA PV of DBO Net defined benefit liability

96 0,000 1,200 ,000 (240, 000)

Dec. 31, 20x1 1,10 0,000 1,25 0,000 (15 0,000)

Service cost: 260, 000

(a) Current service cost (b) Past service cost

-

(c) (Gain) or loss on settlement

260 ,000

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

Defined benefit cost recognized in profit or loss

108, 000 (86 ,400) 21 ,600 28 1,600

Remeasurements of the net defined benefit liability (asset): (28 (a) Actuarial (gains) and losses ,000)

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(b) Difference between interest income on plan assets 16, 400

and return on plan assets (86.4K - 70K) (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

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

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

(1 1,600) 270 ,000

540,000 450,000 45,000 1,035,00 0

198,000 (178,200 ) 19,800

Defined benefit cost recognized in profit or loss

1,054,80 0

Remeasurements of the net defined benefit liability (asset): (a) Actuarial (gains) and losses (18,000) (b) Difference between interest income on 70,200 plan assets and return on plan assets (c) Difference between the interest on the effect of the asset ceiling and the change in the effect of the

Page | 8 asset ceiling

Defined benefit cost recognized in OCI

52,200 1,107,0 00

Total defined benefit cost

7. B Final monthly salary level (60K x 102%(a)) Multiply by: Years of service (from 50 to 60 yrs. old) Lump-sum retirement benefit (a)

73,140 11 804,54 0

ten (10) times

OR Year

Age

Salary = previous balance x 102%

1 2 3 4 5 6 7 8 9 10 11

50 51 52 53 54 55 56 57 58 59 60

60,000 61,200 62,424 63,672 64,946 66,245 67,570 68,921 70,300 71,706 73,140

OR 60,000 x FV of 1 @2%, n=11; 60,000 x 1.218994 = 73,140 Final monthly salary level Multiply by: PV of 1 @10%, n=10 Current service cost in Yr. 1 (b)

(b)

73,140 0.385543 28,199

From end of Yr. 1 to end of Yr. 11 = 10

8. A Final monthly salary level Multiply by:

73,140 5

Page | 9 365,700 0.564474 206,428

Accumulated benefits to date Multiply by: PV of 1 @10%, n=6 (c) Lump-sum retirement benefit (c)

From end of Yr. 5 to end of Yr. 11 = 6

Alternative solution: Long-cut Current service Interest Date cost(d) cost

PV of DBO

Dec. 31, 20x3 Dec. 31, 20x4

2,819.86 6,203.70 10,236.10

28,198.64 31,018.50 34,120.35 37,532.38

Dec. 31, 20x5

15,012.95

41,285.62

Dec. 31, 20x6 Dec. 31, 20x7 Dec. 31, 20x8

20,642.81 27,248.51 34,968.92 43,960.93

45,414.19 49,955.60 54,951.16 60,446.28

28,198.64 62,037.00 102,361.05 150,129.54 206,428.1 2 272,485.11 349,689.23 439,609.32 544,016.53

54,401.65

66,490.91

664,909.09

66,490.91

73,140.00

804,540.0 0

Jan. 1, 20x1 Dec. 31, 20x1 Dec. 31, 20x2

Dec. 31, 20x9 Dec. 31, 20x10 Dec. 31, 20x11

Benefit entitlement

PV of 1 @ 10%, n=10 to 0

(d)

Current service cost

73,140

0.38554329

28,198.64

73,140

0.42409762

31,018.50

73,140

0.46650738

34,120.35

73,140

0.51315812

37,532.38

73,140

0.56447393

41,285.62

73,140

0.62092132

45,414.19

73,140

0.68301346

49,955.60

73,140

0.75131480

54,951.16

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73,140

0.82644628

60,446.28

73,140

0.90909091

66,490.91

73,140

1.00000000

73,140.00

804,540

9. A 10. C 30 employees x 50,000 = 1,500,000

P a g e | 11 PROBLEM 5: CLASSROOM ACTIVITY 1. Solution: PV of defined benefit obligation 4,645,541 239,152 250,395

Benefits paid

-

Actuarial gain

646,794 4,488,29 4

Dec. 31, 20x1

Jan. 1, 20x1 Current service cost Interest cost * Actuarial loss

* (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 ,732 11, 672

-

Benefits paid

474,934 1,663,3 38

Dec. 31

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

20x1 4,488,2 94 1,663,3 38 2,824, 956

20x0 4,645,5 41 1,176,7 32 3,468, 809

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

239,152 -

P a g e | 12 239,152 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

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 Defined benefit cost recognized in OCI

(646,794)

65,507

(581,287) (168,919 )

Total defined benefit cost

5. Solution: Net defined benefit liability (asset) - Jan. 1, 20x1

3,468,809

Contributions

(474,934)

Defined benefit cost Net defined benefit liability (asset) - Dec. 31, 20x1

(168,919) 2,824,956

6. Solution: Dec. 31, 20x1

Net defined benefit liability (squeeze)

Retirement benefits expense Remeasurement of

643,8 53 412,3 68

581,28

P a g e | 13 defined benefit pension plan Cash (contributions)

7 474,93 4

7. D  Choice (a) is incorrect. No retirement benefits were paid during the year.  Choice (b) is incorrect. The total salaries paid during 20x1 decreased. Refer to “Annual covered payroll” in the “Summary of Valuation Results.”  Choice (c) is incorrect. ABC Co.’s retirement plan provides for a lump sum payment only. It does not provide for annual pension payments. 8. A  Asset ceiling is “the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.” (PAS 19.8)  (See #14 ‘Forfeiture of benefits’ in ‘EXCERPT 6 OUTLINE OF BASIC PLAN PROVISIONS’)

 

Choices (b) and (c) are incorrect. Amendment of retirement plan results to either positive or negative past service cost. Choice (d). Death or disability of an employee does not relieve the company of its obligation to pay retirement benefits. See #9 in “Outline of Basis 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  Information from excerpts: Number of male employees: 2 Average age of male employees: 51.5    

51.5 = (65 age of Mr. A + X age of Mr. B) ÷ 2 51.5 x 2 = (65 + X) 103 – 65 = X X = 38

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

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

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 -

P a g e | 15 TOTA L

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 – See #8 in “Outline of Basic Plan Provisions.” 16. D – There was an actuarial gain during the year. This has decreased the PV of DBO. 

Choice (b) is a correct statement. The ₱65,507 remeasurement is a debit (refer to the computation of defined benefit cost in #4 above).

17. B 18. D – The actuary’s opinion shows the following: RE: ABC CO. RETIREMENT PLAN (PAS 19 VALUATION) (Participant to the ABC Co. Multiemployer Retirement Plan) Valuation Date – December 31, 20x1

19. D – best answer. See discussion below:  Choice (a) is incorrect. Same discount rate is used in computing for interest income on FVPA and interest expense on PV of DBO.  Choice (b) is incorrect. An employee can estimate his/her retirement pay using the plan formula, which is “1 month final salary x No. of service years.”  Choice (c) is incorrect. No retirement benefits were paid during 20x1. 20. C (27,000 x 102%) = 27,540 21. D Solution:

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Date of birth Normal retirement age Date of retirement

Mon th 8

Day

Year

14

8

1980 60 2040

14

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: Mon th Date of employment as "Regular" employee Minimum service years

Da y

1

1

1

1

Ye ar 200 1 10 20 11

23. A Solution:

6

1

Date of birth

-6 0

-1 0

Yea r 200 1 195 1 50

Age at date of employment

50

Day

Year

Month Day Date of employment as "Regular" employee

Mon th Date of employment as "Regular" employee Minimum service years

6

1

6

1

2001 10 201 1

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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: Da y

Month Date of employment as "Regular" employee

6

1

-9 -3

-1 0

Date of birth

Age at date of employment

Date of birth Normal retirement age Date of retirement

49 Mon th 9

Day

Year 1

1951 60 2011

9

1

Mont h

Day

9

1

Date of employment as "Regular" employee

-6

-1

Service years

3

0

Date of retirement

No. of service years

Yea r 200 1 195 1 50

Yea r 201 1 200 1 10

10 yrs. and 3 mos.

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

P a g e | 18

Date of retirement

Mon th 6

Day

Year 1

Birth date

-9

-1

Age at date of retirement

-3

0

Age on June 1, 2011

2011 1951 60

59 yrs. and 3 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: Date of employment Date of birth

Age at date of employment

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

Mon th 1 -12 -11

Day 1 -31 -30

Year 1985 -1944 41

40 Mon th 1

Day

Year 1

1985 20

1

1

2005

P a g e | 19 26. B Solution: Final monthly salary level (600K ÷ 12) Multiply by: Service years

50,000 20

Lump sum retirement benefit

1,000,00 0

27. C 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 Mon th

Expected normal retirement date End of reporting period

No. of years before retirement

Day

1 -12 -11

Year

1 -31 -30

2005 -2001 4

Day

Year

3

28. B Solution: Month Date of employment as "Regular" employee Date of birth Age at date of retirement Age at date of employment

1

1

1990

-12 -11

-31 -30

-1944 46

P a g e | 20 45 Mon th Date of employment as "Regular" employee Service years before reaching the age of 60

1

1

Year 1990 15

1

Date of retirement

Date of retirement End of current reporting period

Day

Mon th 1 -12 -11

No. of ye...