CPA Financial Accounting and Reporting (FAR) : Accrued Payroll Expense
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Example Questions
Example Question #1 : Accrued Payroll Expense
A company has a defined benefit plan in operation that covers six employees who have an average of 5 years left to work. On January 1, Year 5, the company amends the plan and this amendment results in an increase in the pension benefit obligation of $350,000. Also in Year 5, the plan's actuary updates the plan's assumptions, which increases the pension benefit obligation by $220,000. What amount is reported in accumulated other comprehensive income related to the defined benefit plan at the end of Year 5?
$220,000
$290,000
$70,000
$500,000
$500,000
The amount reported in AOCI is the amount of these changes that has not yet been amortized. For the plan amendment, amortization begins in the current year over the 5 years the employees plan to continue working ($350K / 5 years = $70K). Therefore, $280K remains in AOCI. For the changes in assumptions, amortization will not begin until the following year, so $220K remains in AOCI.
Example Question #2 : Accrued Payroll Expense
A company starts a defined benefit pension plan on January 1, Year 1. The service cost for the year is $250,000 and plan funding each year is $175,000 (made each January 1). Interest on the projected benefit obligation is 8% while the expected return on plan assets is 10%. How much is pension expense in Year 2?
$210,750
$233,250
$250,000
$192,500
$233,250
Pension service cost is recorded at the end of each Year, with the PBO determined at that time. PBO at the end of Year 1 is equal to $250K. Plan assets at the end of Year 1 are equal to the $175K deposited in January plus the assets earnings over Year 1 of $17,500 ($175K x 10%). Pension expense in Year 2 is equal to $250K service cost + $20K ($250K PBO x 8%) - $36,750K ($367,500 x 10%)
Example Question #3 : Accrued Payroll Expense
The Capstone Company has a defined benefit pension plan. On January 1, Year 12, the plan is amended, causing the projected benefit obligation to increase by $600,000. At that time, the covered employees are expected to work another 8 years on average. How will this amendment be reported in the Year 12 financial statements?
$525,000 is reported as a plan asset and $75,000 is reported as pension expense
$525,000 is reported within accumulated other comprehensive income within stockholder's equity and $75,000 is reported as pension expense
$600,000 is reported as pension expense
$600,000 is reported within accumulated other comprehensive income within stockholder's equity
$525,000 is reported within accumulated other comprehensive income within stockholder's equity and $75,000 is reported as pension expense
Changes in pension plans and assumptions are initially reported in AOCI, and then amortized to pension expense. The company will expense $75K of this amendment ($600K / 8 years) and leave the remaining $525K in AOCI.
Example Question #4 : Accrued Payroll Expense
Investments must be reported at fair value in the financial statements of pension plans and trusts.
Net realizable value
Historical cost
Lower of cost or market
Fair value
Fair value
In the financial statements of employee benefit pension plans, the plan investments are reported at which valuation?
Example Question #5 : Accrued Payroll Expense
The differences between executive and nonexecutive plans is not a disclosure that is required.
The components of net periodic pension cost
A detailed description of the plan including employee groups covered
The differences in executive and nonexecutive plans
The amount of unrecognized prior service cost
The differences in executive and nonexecutive plans
Footnote disclosures in the financial statements for pensions do not require inclusion of which of the following?
Example Question #6 : Accrued Payroll Expense
The net periodic pension cost for the year of a defined benefit pension plan would be reported on:
Income statement
Both
Neither
Statement of changes in net assets
Income statement
A company would only report the net periodic pension cost on the income statement.
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