DEFINE BENEFIT PLAN - SAMPLE PROBLEMS

PROBLEM 1
On January 2, 2012, Power Company provided for a lump sum benefit payable upon
termination of service that is equal to 10% of final salary for each year of service. The salary in
2012 is 400,000 and is assumed to increase at 5% compounded each year. The discount rate to
be used is 10% per annum. Power Company believes that the employee will not leave the
company before the expected retirement date of December 31, 2015. Also, Power Company
believes that there are no changes in actuarial assumptions in future years. What is the present
value of the defined benefit plan as of December 31, 2014?
a. 34,789
b. 76,536
c. 126,287
d. 185,220

Solution:
Final salary on retirement date (2015) (400k x 105% x 105% x 105%) 463,050
X benefit rate 10%
Retirement pay for every service period 46,305

Service years 2012 2013 2014 2015

Retirement pay 46,305 46,305 46,305 46,305
X PV factor 10% .7513 .8264 .9091 1.000
PV of service cost 34,790 38,269 42,095 46,305

PBO, beg none 34,790 76,538 126,287

Interest cost none 3,479 7,654 12,628
Service cost 34,790 38,269 42,095 46,305
PBO, end 34,790 76,538 126,287 185,220

PROBLEM 2

At the beginning of the year, Meow Corporation reported fair value of plan assets at 6,500,000
and projected benefit obligation at 7,500,000. During the current year, the entity determined
that the current service cost was 1,200,000 and the discount rate is 10%. The actual return on
plan assets was 800,00 during the year. The entity provided the following information during
the year related to the defined benefit plan:
 Contribution to the plan 1,200,00
Benefits paid to retirees 1,500,000
Decrease in PBO 200,000
What amount should be reported as projected benefit obligation at year-end?
a. 7,750,000
b. 8,700,000
c. 9,250,000
d. 7,950,000

Solution:
PBO- Jan. 1 7,500,000
Current service cost 1,200,000
Interest expense (10% x 7.5M) 750,000
Decrease in PBO (200,000)
Benefits paid (1,500,000)
PBO December 31 7,750,000

PROBLEM 3
Meowie Company provided the following information pertaining to a pension plan for the
current year:
Actuarial value of PBO, beginning 6,800,000
Assumed discount rate 5%
Service cost 4,500,000
Pension benefits paid 2,100,000

No change in actuarial estimate occurred during the current year.

What is the projected benefit obligation at year end?
a. 1,670,000
b. 9,540,000
c. 1,234,567
d. 1,980,000

Solution:
Actuarial value of PBO 6,800,000
Discount (6.8M x 5%) 340,000
Service cost 4,500,000
Pension benefits paid (2,100,000)
POB, end 9,540,000

PROBLEM 4
On January 2, 2014, Newton Company amended its pension plan to increase pension from 5%
of final salary to 8% of final salary for every year of credited service. The additional benefits are
as follows:
PV of additional benefits for employee service before year 2014:
Vested benefits 6,800,000
Non-vested benefits 4,080,000
Estimated average period until non-vested benefits would become vested is four years.
What amount of past service cost should be included in determining the present value of
benefit obligation in 2014?
a. None
b. 6,800,000
c. 7,820,000
d. 10,880,000

Solution:
Vested past service cost 6,800,000
Non-vested past service cost 4,080,000
Total past service that will increased
Benefit obligation 10,880,000

PROBLEM 5
Diwata Pares Overload provided the following information with respect to the defined benefit
plan for the current year:
PBO-January 1 3,000,000
PBO- December 31 3,500,000
Contribution to the plan 600,000
Benefits paid 500,000
Discount rate 10%

What is the current service cost for the current year?

a. 700,000
b. 600,000
c. 450,000
 d. 780,000

Solution:
PBO- January 1 3,000,000
Current service cost 700,000 (SQUEEZE)
Discount(3M x 10%) 300,000
Benefits paid 500,000
PBO- December 31 3,500,000

PROBLEM 5
Hatdog Company maintains a fund to cover a pension plan with the following data for the
current year:

January 1 FVPA 8,750,000

Market related value of the pension fund (5-yr weighted) 7,150,000

During year pension benefits paid 600,000

Contribution to the fund 700,000
Actual return on plan assets 950,000
What is the fair value of plan assets on December 31?
a. 8,200,000
b. 9,800,000
c. 7,250,000
d. 8,850,000

Solutions:
FVPA 8,750,000
Contribution 700,000
Actual return 950,000
Pension benefits (600,000)
FVPA- Dec 31 9,800,000

PROBLEM 6
At the beginning of the year, Kemerut Company provided the following information prior to the
adoption of the revised PAS 19:
FV of plan assets 4,750,000
Unamortized past service cost 1,250,000
Projected benefit obligation 5,500,000
Unrecognized actuarial gain 850,000

The transactions for the current year are:

Current service cost 925,000

Discount rate 6%
Actual return on plan assets 485,000
Contribution to the plan 1,350,000
Benefits paid to retirees 995,000
Increase in projected benefit obli 150,000

What amount should be reported as employee benefit expense?

a. 1,255,000
b. 1,540,000
c. 970,000
d. 925,000

Solution:
Current service cost 925,000
Interest expense (6% x 5.5M) 330,000
Interest income (6% x 4.75M) (285,000)
Employee benefits expense 970,000

PROBLEM 7
Jane has worked for her company for 25 years and is about to retire. She is part of a Defined
Benefit Plan that calculates her retirement benefits based on the following formula:

Annual Benefit = Years of Service x Final Average Salary x Benefit Multiplier

The details of her employment and the plan are:
- Years of Service: 25 years
- Final Average Salary: P80,000
- Benefit Multiplier: 1.5%
What is Jane's annual retirement benefit?
a. 30,000
 b. 40,000
c. 50,000
d. 55,000

Solution:
Final average salary 80,000
X years of service 25 yrs
X benefit multiplier 0.015
Annual benefit 30,000

PROBLEM 8
XYZ Corporation has a defined benefit plan for its employees. The following information is
available for the year ended December 31, 2023:
Present Value of Defined Benefit Obligation (DBO) at January 1, 2023 PHP 5,000,000
Fair Value of Plan Assets at January 1, 2023 4,000,000
Service Cost for 2023 600,000
Interest Cost (discount rate is 8%) 400,000
Return on Plan Assets (expected rate is 7%) 280,000
Actual Return on Plan Assets 300,000
Benefits Paid to Retirees in 2023 500,000
Actuarial Gains on DBO due to changes in assumptions 200,000
Contributions made by the employer in 2023 600,000

What is the net defined benefit liability or asset as at December 31, 2023?
a. 1,300,000
b. 2,300,000
c. 1,450,000
d. 1,560,000

Solution:

Opening DBO PHP 5,000,000

Add: Service Cost 600,000
Add: Interest Cost (5,000,000 X 8%) 400,000
Add: Actuarial Gains on DBO 200,000
Less: Benefits Paid (500,000)
Ending DBO PHP 5,700,000
Opening Plan Assets PHP 4,000,000
Add: Contributions by Employer 600,000
Add: Actual Return on Plan Assets 300,000
Less: Benefits Paid (PHP 500,000)
Ending Plan Assets PHP 4,400,000

Net Defined Benefit Liability = Ending DBO - Ending Plan Assets

PHP 5,700,000 - PHP 4,400,000 = PHP 1,300,000

PROBLEM 9
Ponyawa Company provided the following information for the current year:
Current service cost 500,000
Past service cost during the current year 300,000
Interest expense on PBo 600,000
Interest income on plan assets 350,000
Loss on plan settlement 250,000
PV of benefit obligation settled in advance 950,000
Actual return on plan assets 850,000
Actuarial loss on PBO 200,000
Contribution to the plan 1,500,000
Benefits paid to retirees 1,000,000
Discount or settlement rate 10%

What amount should be reported as fair value of plan assets at year-end?

a. 3,650,000
b. 4,650,000
c. 4,900,000
d. 5,850,000

Solution:
FV of plan assets - Jan 1 3,500,000
Contribution to the plan 1,500,000
Actual return on plan assets 850,000
Settlement payment (1,200,000)
Benefit paid to retirees (1,000,000)
FV of plan assets- Dec 31 3,650,000
PV of benefit obligation settled in advance 950,000
Loss on plan settlement before normal retirement 250,000
Settlement payment before retirement 1,200,000

PROBLEM 10
At the beginning of the current year, Tosh Company reported the fair value of plan assets at
6,000,000 and projected benefit obligation at 8,000,000. During the year, the entity made a
lump sum payment to certain plan participants in exchange for their rights to receive specified
postemployment benefits. The lump sum payment was 800,000 and the present value of the
defined benefit obligation settled was 1,000,000. In addition, the following data are gathered
during the current year:
Current service cost 900,000
Actual return on plan assets 800,000
Contribution to the plan 700,000
Discount rate 12%
What amount should be reported as fair value of plan assets at year-end?
a. 7,500,000
b. 6,700,000
c. 6,000,000
d. 5,900,000

Solution:
FVPA - January 1 6,000,000
Contribution 700,000
Actual return 800,000
Lump sum payment (800,000)
FVPA- Dec 31 6,700,000