PRE REVIEW

1ST SEM S.Y. 2011-2012

PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS

PAS 19 - EMPLOYEE BENEFITS

I. DEFINITION

It includes all forms of consideration given by an entity in exchange of services rendered by

employees.

II. Short-term employee benefits – due to be settled within twelve months after the end of the
period in which the employees render the related services
a. Salaries, wages and social security contributions
b. Short term compensated absences such as paid annual leave and sick leave
i. Accumulating compensated absences – carried forward and can be used in future
periods if the current period’s entitlement is not used in full
1. Vesting – employees are entitled
2. Nonvesting – employees are not entitled
ii. Nonaccumulating compensated absences – do not carry forward
c. Profit sharing and bonuses payable within twelve months – only if there is a constructive
obligation
d. Nonmonetary benefits such as medical care, housing, car and free or subsidized goods
• Unpaid short term benefits – accrued expenses
• Short term benefits paid in advance – prepayments
• Cost of short term benefits – expense as incurred

III. Postemployment benefits – employee benefits other than termination benefits, payable after
completion of employment
a. Retirement benefits
b. Postemployment life insurance
c. Postemployment medical care
• Formal or informal arrangements
• Defined benefit plans or defined contribution plans

Defined Contribution Plan Defined Benefit Plan

• The pension ultimately received by the • The pension is based on a
former employee is a function of the formula that is not simply based
contributions that have been made on the contributions made, and
• The cost of the employer is therefore the employer retains a risk that
fixed and predictable they will not be enough to pay the
• No legal or constructive obligation to pensions
meet shortfall • The eventual cost to the
employer is therefore more
difficult to predict

• Funded or unfunded
• Postemployment benefit plans under the law
1. Social security system – defined contribution
2. R.A 7641 – defined benefit

IV. ACOUNTING FOR DEFINED CONTRIBUTION PLAN – entity pays fixed contributions into a
separate entity known as the fund and will have no legal or constructive obligation to pay further
contributions

1. The contribution shall be recognized as expense in the period it is payable

2. The unpaid contribution at the end of the period shall be recognized as accrued
expense
3. Any excess contribution shall be recognized as prepaid expense

V. ACCOUNTING FOR DEFINED BENEFIT PLAN – an entity’s obligation is to provide the agreed
benefits to employees

1. BENEFITS EXPENSES =+Current service cost – increase in the present value of the
defined benefit obligation resulting from employee service in the current period
+ Interest cost – increase in the PV of the DBO which arise because the benefits
are one period closer to settlement (PBO, beg. x interest rate)
- expected return on assets – reflect the changes in the FV of plan assets held
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during the paid out of the fund (FVPA, beg x rate of return)
+actuarial loss
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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
-actuarial gain
+past service cost – actuarially computed present value of the retirement
benefits payable in the future with respect to services rendered prior to
the adaptation or amendment of a retirement plan
+effect of any curtailment or settlement

2. PLAN ASSETS – assets held by a long term benefit fund and qualifying insurance
policies
b. The assets are held by an entity that is legally separate from the reporting entity
c. The assets are available to pay only employee benefits
d. The assets are not available to the reporting entity’s own creditors even in bankruptcy
e. The assets cannot be returned to the reporting entity or can only be retuned if the
remaining assets are sufficient enough to meet all employee benefits
FV of plan assets – beginning xx
Add: contribution to the fund xx
Actuarial gain xx
Actual return xx
Total xx
Less: benefits paid xx
Actuarial loss xx
FV of plan assets – ending xx

3. ACCUMULATED BENEFIT OBLIGATION – the amount is based on current

compensation level of employees and therefore includes no assumptions about future salary
increase

4. PROJECTED BENEFIT OBLIGATION – the amount includes future salary increase that
the entity projects it will pay to employees during the remainder of their employment
- PV of expected future payments required to settle the obligation
arising from employee service in the current and future periods
PBO – beginning xx
Add: Current service cost xx
Past Service cost xx
Actuarial loss xx
Interest Cost xx
Total xx
Less: Benefits paid xx
Actuarial gain xx
PBO – ending xx

5. UNDERFUNDING / OVERFUNDING
• Prepaid benefit cost – FVPA > PBO ; overfunded ; noncurrent asset
• Accrued benefit cost – FVPA < PBO ; underfunded ; noncurrent liability

6. PAST SERVICE COST

• Vested – expense immediately
• Not vested – amortized on a straight line basis over the period until it becomes vested

7. ACTUARIAL GAINS / LOSSES

• If
the actual return > expected return = actuarial gain
• If
the actual return < expected return = actuarial loss
• If
the actual benefit obligation > expected obligation = actuarial loss
• If
the actual benefit obligation < expected obligation = actuarial gain
a. Full recognition approach
b. Corridor approach – recognized a portion of actuarial gains and losses as income
or expense if the net cumulative unrecognized actuarial gains and losses at the
beginning of the current period exceed 10% of the greater between the PBO and FVPA
(amortized over the remaining service period
• Amortization of Actuarial gain – deducted in computation of total benefits expenses
• Amortization of Actuarial loss – added in computation of total benefits expenses
• Unamortized actuarial gain – credit in memo records
• Unamortized actuarial loss – debit in memo records
VI. OTHER LONG TERM EMPLOYEE BENEFITS
a. Long term compensated absences such as long service or sabbatical leave
b. Jubilee or other long-term benefit
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c. Long-term disability benefits

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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
d. Profit sharing and bonuses payable in more than twelve months after the end of the
period in which the employees render the related service
e. Deferred compensation payable in more than twelve months after the end of the period
in which it is earned

VII. DISCLOSURES

DEFINED CONTRIBUTION PLAN

a. General description of the plan
b. The amount recognized as expense during the period

DEFINED BENEFIT PLAN

a. Accounting policy for recognizing actuarial gains and losses
b. General description or the type of plan
c. Reconciliation of the assets and liabilities recognized in the balance sheet
d. Amounts included in the fair value of plan assets
e. Reconciliation showing the movements during the period in the net liability or asset
recognized in the balance sheet
f. Total expense in the income statement for each of the following, and the line item of
the income statement in which they are included
Current service cost
Interest cost
Expected return on plan assets
Actuarial gains and losses
Past service cost
Effect of any curtailment or settlement
g. Actual return on plant assets
h. Principal actuarial assumptions

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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS

VIII. PRACTICE PROBLEMS:

1. Silay Company has established a defined pension plan for its employees. Annual
payments under the pension plan are equal to 3% of an employee’s highest lifetime salary
multiplied by the number of years with the entity. An employee’s salary in 2010 was
P500,000. The employee is expected to retire in 10 years, and the salary increases are
expected to average 4% per year during that period. As of December 31, 2010, the
employee has worked for 15 years. The future value of 1 at 4% for 10 periods is 1.48.

What is the annual pension payment that should be used in computing the projected benefit
obligation on December 31, 2010? ________________________

2. Woodstock Company was established a defined benefit pension plan for its lone
employee. Annual payments under the pension plan are equal to the employee’s highest
lifetime salary multiplied by 2% multiplied by number of year with the entity. As of the
beginning of 2011, the employee had worked for Woodstock Company for 10 years. The
salary in 2010 was P500,000. The employee is expected to retire in 25 years and the salary
increases are expected to average 3% per year during that period. The employee is expected
to live for 15 years after retirement. The discount rate is 8%. The relevant present value and
future value factors are:
PV of an ordinary annuity of 1 at 8% for 15 periods 8.559
PV of 1 at 8% for 25 periods 0.146
Future value of 1 at 3% for 25 periods 2.094

What is the projected benefit obligation on January 1, 2011? _________________

3. A director of Easy Company shall receive a retirement benefit of 10% of the final salary
per annum for a contractual period of three years. The director does not contribute to the
scheme. The anticipated salary over the three years is P1,000,000 for 2010, P1,200,000 for
20111 and P1,440,000 for 2012. The discount rate is 5%

Using the projected unit credit method, what is the estimated pension liability on December
31, 2011? _________________

4. Fair value of plan assets 6,500,000

Projected benefit obligation 7,500,000

The accountant revealed the following information for the current year:

Current service cost 1,600,000

Interest cost – settlement discount rate 10%
Actual return on plan assets 600,000
Long-term rate of return on plan assets 8%
Contribution to the plan 1,500,000

What should be reported as employee benefit expense for the current year? ________________

5. On January 1, 2010, Simple Company has a defined benefit plan with the following
pension information:

Fair value of plan assets 50,000,000

Projected benefit obligation 45,000,000
Cumulative unrecognized actuarial gains 8,000,000

On December 31, 2010, the fair value of the plan assets has risen by P5,000,000 and the
projected benefit obligation has risen by P3,000,000. The actuarial gain is P4,000,000 during
the current year and the average remaining service period of the employees is 20 years.

Under the corridor approach, how much is the amortization of the actuarial gains for 2010?
_________________

Under the full recognition approach, how much actuarial gain is included in other
comprehensive income for 2010? ____________________
6. Adam Company provided the following information on December 31, 2010.
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Prepared by:
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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
Service cost 520,000
Actual return on pension plan asset 810,000
Interest cost 590,000
Excess of expected return over actual return on pension plan asset
150,000
Amortization of deferred pension loss from prior years
240,000
Amortization of past service cost 360,000
Contribution to pension fund 950,000

What is the net pension expense for 2010? _________________

7. On January 1, 2010, the memorandum records of Cagayan de Oro Company showed the
following balances related to its defined benefit plan:

Fair value of plan assets 8,000,000

Unamortized pas service cost 1,500,000
Projected benefit obligation (9,000,000)
Prepaid/accrued benefit cost 500,000

The remaining average vesting period for the employees covered by the past service cost is
5 years. The transactions affecting the defined benefit plan for the current year are as
follows:

Current service cost 1,500,000

Interest cost 800,000
Expected and actual return on plan assets 500,000
Contribution to the plan 2,000,000
Benefits plan to retirees 1,000,000

In the December 31, 2010 statement of financial position, what should be reported as
prepaid benefit cost? __________________________

8. On January 1, 2010, Loch Company established a noncontributory defined benefit plan

covering all employees and contributed P1,000,000 to the plan. On December 31, 2010, Loch
determined that the 2010 current service and interest costs on the plan amount to P620,000.
The expected and actual rate of return on plan assets for 2010 was 10%. What should be
reported on December 31, 2010 as prepaid benefit cost? ________________

9. Quebec Company adopted a defined benefit pension plan on January 1, 2010. Quebec
amortizes the past service cost over 16 years and funds past service cost by making equal
payments to the fund trustee at the end of each of the first ten years.

The current service cost is fully funded at the end of each year. The following data are
available for the current year:

Current service cost 220,000

Past service cost:
Amortized 83,400
Funded 114,400

What is the prepaid pension cost on December 31, 2010? ___________________

10. Nice Company had the following balances relating to its defined benefit plan on
December 31, 2010:

Fair value of plan assets 37,000,000

Past service cost unrecognized 2,000,000
Net actuarial loss unrecognized 3,000,000
Projected benefit obligation 33,000,000
Present value of available future refund and reduction in future contribution
1,000,000

What should be reported as prepaid benefit cost in the December 31, 2010 statement of
financial position? ___________________
11. Libungan Company provided the following information concerning its defined benefit
plan in the trustee’s memorandum records on January 1, 2010:

Fair value of plan assets 9,500,000

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Unamortized past service cost 2,600,000

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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
Projected benefit obligation (12,000,000)
Unrecognized actuarial gain ( 1,000,000)
Prepaid/accrued benefit cost – credit ( 1,700,000)

The transactions for the current year related to the defined benefit plan are:
Current service cost 1,800,000
Interest cost 1,300,000
Expected and actual return on plan assets 1,100,000
Contribution to the plan 2,700,000
Benefits paid to retirees 2,000,000
Increase in projected benefit obligation due to changes in actuarial assumptions
280,000
Amortization period of past service cost and actuarial gain 10
years

What amount should be reported as benefit expense for the current year? ________________

What is the fair value of plan assets on December 31, 2010? ___________________

What is the projected benefit obligation on December 31, 2010? ___________________

What is the net unrecognized actuarial gain on December 31, 2010? _________________

What is the balance of the prepaid/accrued benefit cost amount on December 31, 2010?
___________________

12. Pension plan information for Winter Company is as follows:

January 1, 2010 Projected benefit obligation 3,500,000

Accumulated benefit obligation 2,800,000
During 2010 Pension benefits paid to retired employees
250,000
December 31, 2010 Projected obligation 4,200,000
Accumulated benefit obligation 3,100,000
Discount or settlement rate 10%

Assuming no change in actuarial assumptions, what is the current service cost for 2010?
____________________________

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Prepared by:
Ms. Rosalie S. Fernando
PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS

PAS 19 - EMPLOYEE BENEFITS

POST TEST

THEORIES:
1. Which is not a characteristic of short-term employee benefits?
a. No actuarial assumptions are required to measure the benefit obligation.
b. There is no possibility of any actuarial gain or loss.
c. Short-term employee benefits by definition are payable no later than twelve months after
the end of the current period.
d. Short-term employee benefit obligations are measured on a discounted basis.
2. Which is incorrect concerning the recognition and measurement of a defined contribution
plan?
a. The contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contribution at the end of the period shall be recognized as accrued liability.
c. Any excess contribution shall be recognized as prepaid expense but only to the extent that
the prepayment will lead to a reduction in future payments or a cash refund.
d. An entity shall not disclose the amount recognized as expense for a defined contribution
plan.
3. Which is incorrect concerning the recognition and measurement of a defined contribution
plan?
a. The contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contribution at the end of the period shall be recognized as accrued liability.
c. Any excess contribution shall be recognized as prepaid expense but only to the extent that
the prepayment will lead to a reduction in future payments or a cash refund.
d. An entity shall not disclose the amount recognized as expense for a defined contribution
plan.
4. Which in incorrect concerning return on plan assets?
a. The actual return on plan assets in one component of the expense recognized in the
income statement.
b. The difference between the expected return and actual return on plan assets is an actuarial
gain or loss.
c. The expected return on assets is based on market expectations, at the beginning of the
period, for returns over the entire life of the related obligation.
d. In determining the expected and actual return on plan assets, an entity shall deduct plan
administration cost not included in actuarial assumptions used in measuring defined benefit
obligation, and tax payable by the plan itself.
5. Which is correct concerning past service cost?
I. The past service cost shall be expensed immediately when additional benefits vest
immediately.
II. If the benefits are not vested the past service cost is amortized on a straight line basis
over the period until the benefits become vested.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. The “surplus” contemplated under PAS 19 shall not exceed the sum of the
a. Unrecognized past service cost and unrecognized actuarial loss.
b. Unrecognized past service cost and present value of refund from the plan.
c. Unrecognized actuarial loss and present value of refund from the plan.
d. Unrecognized past service cost, unrecognized actuarial loss and present value of refund
from the plan.
7. Demographic actuarial assumptions deal with all of the following, except
a. Mortality, both during and after employment
b. Rate of employee turnover
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c. Disability and early retirement

d. Expected rate of return on plan assets
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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
8. Which statement is correct concerning actuarial gains and losses?
I. Actuarial gains and losses comprise of experience adjustments and the effects of
changes in actuarial assumption.
II. Actuarial gains and losses may result from increases or decreases in either the present
value of defined benefits obligation or the fair value of plan assets.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
9. An entity operates a defined benefit pension plan and changes it at the beginning of the
current year to a defined contribution plan. The net pension liability after the plan amendment is
less than the net pension liability before the plan amendments. How should the entity account for
this change?
a. The entity shall recognize a gain.
b. The entity does not recognize a gain.
c. The entity shall recognize a gain over the remaining service period of the employees.
d. The entity shall recognize the gain but applies the 10% corridor approach.
10. The amount recognized as liability in the statement of financial position shall be the net total
of the following amounts (choose the incorrect one)
a. The present value of projected benefit obligation at the end of reporting period
b. Plus any actuarial gain, less any actuarial losses, not yet recognized
c. Plus any past service cost not yet recognized
d. Minus the fair value of plan assets at the end of reporting period

PROBLEMS:

11. Abba Company has an unrecognized actuarial gain of P425,000 relating to its pension plan as
of January 1, 2010. Management has chosen to amortize this deferral on a straight line basis over
the 10-year average remaining service life of its employees. Additional facts about the pension
plan as of January 1, 2010 are as follows:

Projected benefit obligation 2,050,000

Accumulated benefit obligation 1,900,000
Fair value of plan assets 1,500,000
Market related value of the pension fund (5-year weighted average) 1,350,000

What is the minimum amortization of unrecognized actuarial gain for 2010?

a. 22,000
b. 23,500
c. 25,500
d. 29,000
12. Starex Company had the following pension-related balances on January 1, 2010:

Projected benefit obligation 2,000,000

Fair value of pension fund 2,300,000
Unrecognized net pension loss 310,000
Unrecognized past service cost 100,000

The average remaining service period of employees working on January 1, 2010 is five years.

What is the amortization of the unrecognized net pension loss during the year?
a. 62,000
b. 16,000
c. 20,000
d. 36,000
13. Tijuana Company operates a defined benefit plan and recognizes actuarial gains and losses in
profit or loss under the corridor approach

On January 1, 2010, the plan assets were P8,000,000, the defined benefit obligation was
P9,000,000 and the unrecognized actuarial losses were P1,200,000. During the year ended
December 31, 2010, actuarial gains of P150,000 arose. The average remaining working period of
participating employees was 20 years on both January 1 and December 31, 2010

What is the amount of cumulative unrecognized actuarial losses on December 31, 2010?
a. 1,050,000
b. 1,035,000
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c. 1,185,000
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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
d. 1,335,000
14. On January 1, 2010, Butuan Company has a defined benefit plan with the following details:
Fair value of plan assets 8,000,000
Projected benefit obligation 7,000,000
Unrecognized net actuarial gain 1,500,000

Other relevant information for the current year is as follows:

Current service cost 1,800,000

Interest cost 700,000
Contribution to the plan 1,500,000
Expected return on plan assets 8%
Average service period of employees 5 years

What is the employee benefit expense for the current year?

a. 1,500,000
b. 1,560,000
c. 1,720,000
d. 2,500,000
15. Batanes Company obtains the following from its actuary on January 1, 2010:

Projected benefit obligation 9,000,000

Fair value of plan assets 10,000,000
Unrecognized net actuarial loss 1,500,000

During the current year, the actuary determined the current service cost at P2,500,000 and
interest cost at P900,000. The expected and actual return on plan assets was P1,200,000. The
average remaining service period of the covered employees is 10 years. What is the benefit
expense for the current year?
a. 2,250,000
b. 2,200,000
c. 2,350,000
d. 3,400,000
16. On January 1, 2010, Sheryll Company adopted a defined benefit plan. The plan’s service cost of
P750,000 was fully funded at the end of 2010. Past service cost was funded by a contribution of
P300,000 in 2010. Amortization of past service cost was P120,000 for 2010. What is the prepaid
pension cost on December 31, 2010?
a. 180,000
b. 300,000
c. 420,000
d. 540,000
17. Zamba Company adopted a defined benefit plan on January 1, 2009. The plan does not provide
any retroactive benefits for existing employees. The pension funding payment is made to the
trustee on December 31 each year. The following information is available:

2009 2010
Service cost 1,500,000 1,650,000
Funding payment 1,700,000 1,850,000
Interest on defined benefit obligation 150,000
Expected and actual return on plan assets 180,000

In the December 31, 2010 statement of financial position, what should be reported as prepaid
pension cost?
a. 200,000
b. 250,000
c. 430,000
d. 400,000
18. The following information pertains to Lee Company’s defined benefit plan for the current year:

Current service cost 1,600,000

Actual and expected gain on plan assets 350,000
Unexpected loss on plan assets related to a disposal of a subsidiary 400,000
Amortization of unrecognized past service cost 50,000
Annual interest on pension liability 500,000

What amount should be reported as net periodic pension cost in the current year?
a. 2,500,000
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b. 2,200,000
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1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
c. 2,100,000
d. 1,800,000
19. Bronson Company sponsors a noncontributory defined benefit pension plan. On December 31,
2010, the end of the entity’s accounting period, the entity received the projected benefit
obligation report from the independent actuary. The following data were included:

Pension benefits Paid 135,000

Balance, PBO, at December 31, 2010 2,160,000
Interest cost 120,000
Discount rate used by actuary 8%

What is the current service cost for 2010?

a. 675,000
b. 810,000
c. 540,000
d. 255,000
20. The following information relates to the defined benefit pension plan of Ronald Company for
the year ended December 31, 2010:

Projected benefit obligation, January 1 4,600,000

Projected benefit obligation, December 31 4,730,000
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 20,000
Employer contribution 425,000
Benefits contribution 390,000
Settlement rate 10%

What is the net periodic pension cost that should be reported in the income statement for 2010?
a. 20,000
b. 90,000
c. 50,000
d. 70,000
21. Manaoag Company maintains a fund to cover its pension plan. The following data relate to the
fund for the current year:

January 1 FVPA 8,750,000

Market-related value of the pension fund (5-year weighted average)7,150,000
During year Pension benefits paid 600,000
Contribution made to the fund 700,000
Actual return on plan assets 950,000

What is the fair value of plan assets (FVPA) on December 31?

a. 8,200,000
b. 9,800,000
c. 7,250,000
d. 8,850,000

Macro Company has a defined benefit pension plan. On January 1, 2010, the following balances
were computed for the pension plan:
Unrecognized pension gain 420,000
Fair value of pension fund 3,300,000
Market-related value of pension fund (5-year weighted average) 2,850,000
Projected benefit obligation 3,900,000
Accumulated benefit obligation 3,500,000
Net pension expense, exclusive of pension gain or loss component 530,000

It was anticipated that the pension plan would earn 12% of the market-related value of the
pension fund in 2010. The actual return on the pension fund was P315,000. The entity has elected
to amortize the unrecognized pension gains and losses over 10 years.

22. What is the amount of pension gain or loss deferral in 2010?

c. 27,000 loss
d. 27,000 gain
e. 81,000 loss
f. 81,000 gain
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23. What is the amount of amortization of unrecognized pension gain or loss for 2010?
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PRE REVIEW
1ST SEM S.Y. 2011-2012
PRACTICAL ACCOUNTING 1 / THEORY OF ACCOUNTS
a. 42,000
b. 39,300
c. 9,000
d. 3,000
24. What is the net pension expense after including the pension gain or loss component?
a. 530,000
b. 527,000
c. 500,000
d. 560,000
25. What is the unrecognized pension gain or loss on December 31, 2010?
a. 390,000 gain
b. 390,000 loss
c. 444,000 gain
d. 444,000 loss

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Prepared by:
Ms. Rosalie S. Fernando