Quiz 19: Accounting for Employee Compensation and Benefits

The first step in measuring compensation expense from granting employee stock options is to determine the fair value on the date of grant.

The fair value of stock options on the date of grant is usually readily determinable.

The value of stock options expected to be forfeited reduce compensation expense.

An employee will generally exercise stock options only when the current market price is above the exercise price of the option.

The fixed price paid by an employee to acquire a share of stock under an option plan is the ________. A) exercise price B) market price C) historical price D) book price

Which of the following items is generally not specified by a compensation arrangement involving stock options? A) number of options granted B) current market price C) exercise price D) vesting period

Which of the following statements regarding stock options is true? A) An employee will exercise a stock option only when the current market price of the stock is less than the option price. B) Unexercised options may be sold or transferred in the open market. C) Employee stock options are a restricted form of a call option. D) Companies expense stock-based compensation at the fair value of the stock on the expected date of exercise.

Compensation expense associated with stock options is ________. A) based upon the book value of the options B) based upon the estimated fair value of the options C) recorded on the date that the options are granted D) allocated as expense over the time period until the options expire

Among Fortune 500 companies, which of the following compensation plans is most common? A) stock options B) profit-sharing C) employee stock ownership D) deferred compensation

List and explain the terms that are required to account for the issuance of stock options.

An employee who receives an equity-classified award of stock options has the right to receive shares of stock.

The initial journal entry to record an equity-classified award of stock options increases stockholders' equity on the balance sheet.

The initial journal entry to record an equity-classified award serves as a disclosure for a stock option plan.

A stock option plan is generally revalued whenever there is a change in the estimated percentage of options that will be forfeited.

The compensation associated with equity-classified awards of stock options is ________. A) the estimated book value of the options B) the estimated fair value of the options C) allocated to compensation expense until the options expire D) recorded as compensation expense when the options are granted

If an unexpected forfeiture of options occurs under a stock option plan, the change in compensation is treated as ________. A) a change in estimate B) an adjustment to additional paid in capital C) an adjustment to deferred compensation D) a change in other comprehensive income

For an equity-classified award of stock options, what journal entry is made at the date of grant? A) No journal entry is prepared. B) C) D)

What is the effect of an equity-classified award of stock options on the grant date? A) no change in total equity or net income B) increase in total equity and increase in net income C) decrease in total equity and decrease in net income D) increase in total equity and decrease in net income

When compensation is recognized under an equity-classified award of stock options, the expiration of stock options is treated as ________. A) a prior period adjustment B) an adjustment to compensation expense C) a reclassification of shareholders' equity D) a change in accounting estimate

On January 1, Year 1, Fields Corporation granted 500,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. The vesting period is 3 years. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $12 on the date of grant. What amount should Fields recognize as compensation expense for Year 1? A) $0 B) $2,000,000 C) $750,000 D) $6,000,000

On January 1, Year 1, Fields Corporation granted 300,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $13 on the date of grant. What is the fair value of the award? A) $3,900,000 B) $3,000,000 C) $900,000 D) $4,500,000

On January 1, Year 1, Fields Corporation granted 200,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $11 on the date of grant. Fields chooses to adjust the fair value of the options for the estimated forfeitures. If unexpected turnover in Year 2 caused Fields to estimate that 12% of the options would be forfeited, what amount of compensation expense should Fields recognize in Year 2? (Round intermediate calculations and your final answer to the nearest dollar.) A) $0 B) $1,290,667 C) $733,333 D) $557,334

On January 1, Year 1, Davenport Corporation granted an employee 10,000 options to purchase 10,000 shares of Davenport's $10 par common stock at $30 per share. The options became exercisable on December 31, Year 3, after the employee completed three years of service. The option was exercised on February 1, Year 4. The market prices of Davenport's stock were as follows: January 1, Year 1, $40; December 31, Year 3, $60; and February 1, Year 4, $55. An options pricing model estimated the value of the options at $20 each on the grant date. For Year 1, Davenport should recognize compensation expense of ________. (Do not round intermediate calculations. Only round your final answer to the nearest dollar.) A) $0 B) $66,667 C) $100,000 D) $200,000

On January 1, Year 1, Gallagher Corporation issued 700,000 stock options for 700,000 shares to a division manager. The options have an estimated fair value of $10 each. These options are not exercisable unless division revenue increases by 8% in four years. Gallagher estimates that it is probable that the goal will be achieved. What is pretax compensation expense for year 1? A) $0 B) $1,750,000 C) $2,333,333 D) $7,000,000

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 110,000 options were granted for 110,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $4 based upon an option pricing model. What is the fair value of the award? A) $110,000 B) $330,000 C) $440,000 D) $660,000

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 110,000 options were granted for 110,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $5 based upon an option pricing model. What is the journal entry to record compensation expense for Year 1? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.) A) B) C) D)

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Assume that Schmidt chooses to adjust the fair value of the options for the estimated forfeitures. What is the journal entry to recognize compensation expense and record the change in vesting probability in Year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.) A) B) C) D)

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Schmidt chooses to adjust the Fair value of the options for the estimated forfeitures. What is the journal entry to record compensation expense for year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.) A) B) C) D)

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 120,000 options were granted for 120,000 $1 par common shares. The exercise price equals the $8 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $4 based upon an option pricing model. What is the journal entry to record the exercise of 85% of the options during Year 4 when the market price of the stock was $10? A) B) C) D)

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 120,000 options were granted for 120,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model. What is the entry to record the expiration of 15% of the options on December 31, Year 5? A) B) C) D)

Walker, Incorporated Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option. -Refer to Walker Corporation. Make the journal entries to record compensation expense for Year 1.

Walker, Incorporated Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option. -Refer to Walker Corporation. On April 1, Year 7, when the market price of Walker's stock was $20 per share, 15,000 of the options were exercised. Make the appropriate journal entry to record this transaction.

Walker, Incorporated Walker, Incorporated uses stock options as a compensation incentive for its top executives. On January 1, Year 1, 25,000 options were granted, each giving the holder the right to acquire one $5 par common share. The exercise price is $60 per share. The vesting period is 4 years. Options vest on January 1, Year 5 and cannot be exercised before that date and will expire on December 31, Year 8. The fair value of the 25,000 options, estimated by an appropriate option pricing model is $50 per option. -Refer to Walker Corporation. Assuming that all compensation expense has been recorded, record the journal entry to reflect the expiration of 3,000 options that were never exercised.

Allied Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 100,000 options were granted for 100,000 $10 par common shares. The exercise price equals the $25 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $15 based upon an option pricing model. At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Allied chooses to adjust the fair value of options for the estimated forfeitures. What are the journal entries to reflect the first year and second years' compensation expense? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

When a company grants a liability-classified award, it does not make an entry at the grant date.

The carrying value of liability-classified awards is not adjusted for changes in fair value.

An employee will not redeem a liability-classified award when the stock is out of the money.

An employee will not redeem a liability-classified award when the market price is less than the exercise price.

When liability-classified stock options expire, additional paid-in capital is increased.

Which of the following is not a situation in which employee compensation is classified as a liability? A) The option is granted for the acquisition of securities classified as equity securities. B) The option is granted for the acquisition of securities classified as liabilities, such as redeemable preferred stock. C) The employee can sell back the acquired shares to the employer corporation at the exercise price within a reasonable period of time. D) The compensation is in the form of cash-settled stock appreciation rights.

Which of the following statements about liability-classified awards is true? A) When a company records compensation expense, it will adjust additional paid-in capital at the grant date. B) In accounting for liability-classified awards, a company records deferred compensation at the grant date. C) The value of a liability-classified award is typically based on the company's equity. D) The value of liability classified awards remains unchanged until the award is settled.

On January 1, Year 1, Axis Corporation granted employees 48,000 stock options for 48,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $23. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $31 per option and the company does not expect any forfeitures of the options. What is the amount of compensation expense for Year 1? A) $744,000 B) $0 C) $1,488,000 D) $1,104,000

On January 1, Year 1, Axis Corporation granted employees 53,500 stock options for 53,500 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $39 per option and the company does not expect any forfeitures of the options. What is the journal entry for compensation expense for Year 1? A) B) C) D)

On January 1, Year 1, Axis Corporation granted employees 66,000 stock options for 66,000 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $20. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $39 per option and the company does not expect any forfeitures of the options. At the end of Year 2, the fair value of each option is $44. What is the journal entry for compensation expense for Year 2? A) B) C) D)

On January 1, Year 1, Axis Corporation granted employees 63,000 stock options for 63,000 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $31 per option. Two years later, the options are exercised. What is the appropriate journal entry? A) B) C) D)

On January 1, Year 1, Axis Corporation granted employees 82,000 stock options for 82,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $22. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $31 per option. Unfortunately, the company experiences a series of setbacks and the stock price falls in Year 4. At December 31, Year 4, the options have a fair value of $18 per option. At the end of four years, none of the options have been exercised. What is the appropriate journal entry to record the expiration of the options? A) B) C) D)

Which of the following statements is true concerning adjustments to Compensation Expense? A) Compensation Expense is adjusted when there is a change in vesting probability for both equity-classified and liability-classified awards. B) Compensation Expense is adjusted when there is a change in fair value for equity-classified and liability-classified awards. C) Compensation Expense is adjusted for equity-classified awards when there is a change in vesting probability or change in fair value. D) Compensation Expense is adjusted when there is a change in fair value for a liability-classified award, but not for a change in vesting probability.

List the conditions in which employee compensation is classified as a liability under liability classified awards.

On January 1, Year 1, Axis Corporation granted employees 50,000 stock options for 50,000 shares of $2 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. At the time of issue, the fair value of the options is estimated to be $38 per option. Two years later, on January 1, Year 3, the options are exercised. What are the appropriate journal entries on the date that the options are granted, at the end of Year 1, at the end of Year 2, and on the date that the options are exercised?

An employee who is awarded stock appreciation rights must purchase the related shares.

To account for stock appreciation rights settled with cash, a company records compensation expense and a related liability.

In non-compensatory employee stock purchase plans, a company will record the amount of the discount below the regular market price as compensation expense.

Restricted stock plans are less dilutive than stock option plans.

Which of the following statements is false? A) Stock appreciation rights are a form of compensation similar to a bonus. B) Employees holding stock appreciation rights are required to purchase shares on the vesting date. C) The employee benefits from stock appreciation rights only if the stock price increases. D) The liability for a SAR is measured as the difference between the stock price and the pre-established price.

On January 1, 2017, Cable Corporation issues 11,500 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share December 31, 2018 $15 per share December 31, 2019 $14 per share What is the appropriate journal entry on December 31, 2017? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.) A) B) C) D)

On January 1, 2017, Cable Corporation issues 6,000 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share December 31, 2018 $15 per share December 31, 2019 $14 per share What is the appropriate journal entry on December 31, 2018? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.) A) B) C) D)

On January 1, 2017, Cable Corporation issues 15,000 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $12 per share December 31, 2018 $15 per share December 31, 2019 $13 per share What is the appropriate journal entry on December 31, 2019? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.) A) No journal entry. B) C) D)

On January 1, 2017, Cable Corporation issues 12,500 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $8 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2020. The rights expire on January 1, 2022. The closing market prices follow: December 31, 2017 $11 per share December 31, 2018 $14 per share December 31, 2019 $12 per share What is the appropriate journal entry when the stock-appreciation rights are exercised on January 1, 2020 when the market price is $12 per share? A) B) C) D)

Which of the following is not a characteristic of a restricted stock plan? A) The employee cannot sell the awarded shares until the vesting period has expired. B) A restricted stock plan has value as long as the underlying shares are selling above zero. C) Restricted shares are not stock options. D) The employee is taxed on the stock award when it is granted.

The compensation associated with a share of stock under a restricted stock plan is computed as ________. A) the market price of a share of a similar security B) the book value of an unrestricted share of the same stock C) the market price of an unrestricted share of the same stock D) the book value of a share of similar stock

Which of the following conditions is not required for an employee stock purchase plan to be non-compensatory? A) The plan is made available to substantially all employees. B) After the plan is established, there is a maximum one-month period to elect to participate in the plan. C) The discount is not larger than 5% of the open market price. D) Top-level employees may purchase no more than a set percentage of shares available.

On January 1, 2017, Bubert Corporation issues 8,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. What is the amount of deferred compensation recorded on January 1, 2017? A) $212,500 B) $195,500 C) $17,000 D) $178,500

On January 1, 2017, Bubert Corporation issues 12,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $19 and there is a four-year vesting period. What is the amount of compensation expense recorded on December 31, 2017? A) $59,375 B) $53,125 C) $237,500 D) $25,000

On January 1, 2017, Smart Corporation issues 12,500 shares of $2 par restricted stock to a key executive. The market value of unrestricted shares of the same stock on the date of issue is $18 and there is a four-year vesting period. On January 1, 2018, the executive leaves and forfeits the restricted stock award. The journal entry to record the forfeiture includes which of the following? A) credit Deferred Compensation $56,250 B) credit Common Stock $25,000 C) debit Deferred Compensation for $25,000 D) credit Compensation Expense for $56,250

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 33,000 shares at a time when the established market price was $26 per share. Teague will record compensation expense associated with July purchases of ________. A) $0 B) $85,800 C) $772,200 D) $858,000

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 40,000 shares at a time when the established market price was $26 per share. Teague will record an increase in cash of ________ associated with July purchases. A) $0 B) $104,000 C) $936,000 D) $1,040,000

Block Corporation permits key employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 36,000 shares at a time when the established market price was $31 per share. Block will record salary expense associated with July purchases of ________. A) $0 B) $111,600 C) $1,004,400 D) $1,116,000

On January 1, 2017, Bubert Corporation issues 10,000 shares of $5 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. Record the journal entries for the issuance of the restricted shares, as well as compensation expense for the first year.

On January 1, 2017, Smart Corporation issues 10,000 shares of $5 par restricted stock to an executive. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. On January 1, 2018, the executive leaves and forfeits the restricted stock award. Record the journal entries for the issuance of the restricted shares, compensation expense for the first year, and forfeiture of the restricted stock.

Teague Corporation permits key employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 20,000 $2 par shares of common stock at a time when the established market price was $30 per share. What is the journal entry to record issuance of these shares?

Teague Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 20,000 $2 par shares of common stock at a time when the established market price was $30 per share. What is the journal entry to record issuance of these shares?

Companies are required to disclose the intrinsic values of outstanding stock options granted.

Accountants must make a judgment about the probability of forfeiture in a stock-based compensation plan.

Which of the following statements regarding disclosures for stock-based compensation plans is false? A) An entity is required to disclose the intrinsic values of outstanding stock options granted. B) The effect on the stock-based compensation plans on the entity's cash flows must be disclosed. C) An entity must disclose information only for vested shares that are exercised and exercisable. D) An entity must provide a reconciliation of beginning and ending amounts for the number and weighted average exercise price of share options.

List the four key areas that minimum disclosures for stock-based compensation plans must address.

In what ways must an accountant exercise judgment in relation to stock-based compensation plans?

In a noncontributory pension plan, employees must fund some or all pension benefits.

In a contributory pension plan, employees must fund some or all of their pension costs.

The vested benefit obligation uses future salary levels.

The accumulated benefit obligation reflects only current salary levels.

Under a defined-contribution pension plan, the contribution is fixed but benefits can vary.

Under a defined-benefit pension plan, employees are responsible for losses on plan assets.

Under a defined-benefit plan, the contribution is fixed but benefits can vary.

Which of the following is not a method of measuring a company's pension benefit obligation to a company? A) projected benefit obligation B) vested benefit obligation C) future benefit obligation D) accumulated benefit obligation

Which of the following is a characteristic of a defined-contribution pension plan? A) Employer contributions are typically based upon salary levels of employees. B) Employers must make contributions for prior service costs to a defined contribution plan. C) Pension plan assets draw interest that may be used to reduce annual contributions to the plan. D) Employers bear the risk of loss on pension fund assets.

Which of the following is a characteristic of a defined-benefit pension plan? A) It raises few accounting issues for employers. B) Retirement benefits are based on the plan benefit formula. C) It is simple to construct. D) Retirement benefits are contingent on how much an employee has accumulated in a retirement account.

Which of the following is not a factor in calculating a defined benefit for a pension? A) percentage B) current salary level C) return on plan assets D) credits for years of service

Which of the following measures of benefit obligations does the FASB require for pension computations? A) vested benefit obligation B) accumulated benefit obligation C) projected benefit obligation D) future benefit obligation

Which of the following is a characteristic of the projected benefit obligation measurement? A) It considers only vested employees. B) It uses projected future salary levels. C) It is the smallest estimate of the pension obligation. D) It considers only current employees.

Which of the following is a characteristic of the accumulated benefit obligation measurement? A) It considers only vested employees. B) It does not use projected future salary levels. C) It is required by GAAP for measurement of the pension obligation. D) It considers only current employees.

The net pension liability is decreased by ________. A) amortization of prior service costs B) service costs C) expected return on plan assets D) amortization of net gain in other comprehensive net income

The portion of the obligation than plan participants are entitled to receive regardless of their continued employment is called the ________. A) retiree benefit obligation B) projected benefit obligation C) accumulated benefit obligation D) vested benefit obligation

List and explain the three methods used to measure a company's pension obligation to its employees.

The difference between pension plan assets and the PBO is equal to the funded status of the plan.

A net pension liability is the excess of the projected benefit obligation over the plan assets.

Under the corridor approach, a company only amortizes the net accumulated unamortized actuarial gain or loss when the beginning accumulated unamortized balance of the net actuarial gain or loss exceeds the corridor.

Prior service cost is recognized as pension expense over a period of several years under U.S. GAAP.

Prior service cost is recognized as pension expense over a period of several years under IFRS.

Which of the following is not a key element of pension expense under a defined-benefit pension plan? A) amortization of future benefit obligations B) service cost C) expected return on plan assets D) interest on projected benefit obligation

The increase in the projected benefit obligation from one additional year of service from employees is referred to as ________. A) employer contribution B) service cost C) expected return on plan assets D) prior service cost

When a company amends their existing pension plan to increase the defined-benefit rate, the associated expense is referred to as ________. A) employer contribution B) service cost C) expected return on plan assets D) prior service cost

What is the proper treatment of prior service costs? A) Prior service costs are included in other comprehensive income and amortized over future periods. B) Prior service costs are included in other comprehensive income and amortized retroactively over the most recent three periods. C) Prior service costs are included in net income and expensed in the current year. D) Prior service costs are included in net income and amortized over future periods.

Interest cost will ________. A) increase pension expense and reduce plan assets B) increase the PBO and reduce plan assets C) increase the PBO and increase pension expense D) increase pension expense and reduce the return on plan assets

The projected benefit obligation (PBO) is decreased by ________. A) payment of retirement benefits B) a return on plan assets that is higher than expected C) an increase in the average life expectancy of employees D) a decrease in the actuary's assumed discount rate

If a pension plan is underfunded, it means that the ________. A) ABO exceeds plan assets B) PBO is less than plan assets C) ABO is less than plan assets D) PBO exceeds plan assets

When a pension plan is amended to recognize previous service of currently employed employees, what component of pension expense is created? A) transition costs B) amendment costs C) past service costs D) prior service costs

How is interest cost calculated for a defined benefit pension plan? A) Multiply the beginning balance PBO by the settlement rate. B) Multiply the beginning balance ABO by the settlement rate. C) Multiply the PBO by the expected return on the plan assets. D) Multiply the ABO by the expected return on the plan assets.

Merciful Industries has a beginning PBO balance of $600,000 and a settlement rate of 6%. What is the journal entry to record interest expense on the pension obligation? A) B) C) D)

Merciful Industries has a beginning PBO balance of $500,000 and a settlement rate of 6%. As a result of an amendment to the current union contract, there are prior service costs of $49,000. What is the journal entry to record the change to the current union contract? A) B) C) D)

Merciful Industries has a beginning PBO balance of $500,000 and a settlement rate of 7%. As a result of an amendment to the current union contract, there are prior service costs of $46,500. What is the journal entry to record amortization of the prior service costs for the second year, assuming that the company uses a 5-year amortization period? A) B) C) D)

Merciful Industries has a beginning PBO balance of $600,000 and a settlement rate of 6%. As a result of an amendment to the current union contract, there are prior service costs of $52,000. What is the journal entry to record interest expense on the pension obligation? A) B) C) D)

Merciful Industries has a beginning PBO balance of $900,000 and a settlement rate of 6%. The expected return is 7%. The beginning balance of pension plan assets is $1,000,000. What is the journal entry to record the expected return on plan assets? A) B) C) D)

Amortizing a net actuarial loss for pensions will ________. A) increase retained earnings and increase accumulated other comprehensive income B) increase retained earnings and decrease accumulated other comprehensive income C) decrease retained earnings and decrease accumulated other comprehensive income D) decrease retained earnings and increase accumulated other comprehensive income

Amortizing a net actuarial gain for pensions will ________. A) increase retained earnings and increase accumulated other comprehensive income B) increase retained earnings and decrease accumulated other comprehensive income C) decrease retained earnings and decrease accumulated other comprehensive income D) decrease retained earnings and increase accumulated other comprehensive income

At December 31, Year 1, Musslewhite Corporation reported a net loss of $2.5 million related to its pension plan, because the actuarial assumptions related to future salary levels changed. Musslewhite's entry to record the results of this change will include ________. A) a debit to OCI - Actuarial Gains/Losses and a credit to Projected Benefit Obligation B) a debit to Projected Benefit Obligation and a credit to OCI - Loss C) a debit to pension expense and a credit to Projected Benefit Obligation D) a debit to pension expense and a credit to OCI - Loss

If a pension plan is overfunded, it means that the ________. A) ABO exceeds plan assets B) PBO is less than plan assets C) ABO is less than plan assets D) PBO exceeds plan assets

Which of the following is not a component of annual pension expense? A) service cost B) amortization of prior service costs C) actual return on plan assets D) interest on the projected benefit obligation

Apple Plumbing reports actual returns on plan assets of $140,000, while the expected return was $121,000. In addition, an employee wellness program has resulted in changes in actuarial assumptions that result in an increase in the PBO of $24,000. What is the journal entry to record the gain on plan assets? A) B) C) D)

Apple Plumbing reports actual returns on plan assets of $200,000, while the expected return was $181,000. In addition, an employee wellness program has resulted in changes in actuarial assumptions that result in an increase in the PBO of $24,000. What is the journal entry to record the change in actuarial assumptions? A) B) C) D)

Premier Sports Inc has a beginning PBO balance of $615,000 and a beginning market-related value of plan assets of $550,000. The net actuarial gain at the beginning of the period is $89,000 and the average employee base has a remaining service life of 20 years. What is the corridor? A) $61,500 B) $55,000 C) $27,500 D) $58,250

Premier Sports Inc has a beginning PBO balance of $628,000 and a beginning market-related value of plan assets of $560,000. The net actuarial gain at the beginning of the period is $87,500 and the average employee base has a remaining service life of 20 years. What is the required amortization of actuarial gains or losses for the current year? A) $1,235 B) $3,140 C) $4,375 D) $24,700

A company's defined-benefit pension plan had a projected benefit obligation (PBO) of $380,000 on January 1, Year 1. During Year 1, pension benefits paid were $70,000. The settlement rate for the plan for Year 1 was 12%. Service cost for the year was $109,000. Plan assets (fair value) increased during the year by $50,000. What was the PBO at December 31, Year 1? A) $310,000 B) $425,600 C) $489,000 D) $464,600

How does IFRS differ from GAAP when accounting for defined-benefit pension plans? A) IFRS requires current period expensing of prior service costs while GAAP amortizes prior service costs over time. B) GAAP allows companies to add interest cost and deduct expected return from pension expense in non-operating income. IFRS allows the net interest (from PBO and plan assets) to be reported in operating or financing income. C) GAAP requires separate rates of interest for the PBO and expected return on plan assets. IFRS uses the same rate for both. D) GAAP amortizes current year net actuarial gains and losses using the corridor approach, while IFRS does not amortize actuarial gains/losses. IFRS reports actuarial gains/losses in other comprehensive income.

Mega Corporation sponsors a defined-benefit plan for its employees. The beginning balance of the unamortized net actuarial gain is $250,000. The plan's custodian reports that the beginning balance of the PBO is $1,450,000 and the beginning balance of the market-related value of the plan assets is $1,100,000. The average remaining service life of Mega's pension plan eligible employees is 10 years. Compute the current year's amortization required by the corridor method and prepare the journal entry.

Mega Corporation sponsors a defined-benefit plan for its employees. Compute the pension cost for the year, given the following information: Service cost $30,000 Interest on beginning PBO $16,000 Expected return on plan assets $45,000 Amortization of prior service costs $5,000 Amortization of net actuarial gain $12,000

Explain the differences between accounting for defined benefit pension plans under IFRS and under GAAP.

List and describe the five components of annual pension expense.

When pension plan assets exceed pension plan obligations, the pension plan is overfunded.

An underfunded pension plan increases a company's leverage.

A higher than expected return on plan assets increases pension costs.

Nonpublic entities are not required to separately disclose the components of net periodic benefit cost for pensions.

Which of the following statements about pension plan disclosures is true? A) The difference between the projected benefit obligation and the plan assets at fair value represents the unfunded status of the plan reported on the balance sheet. B) Public entities are not required to disclose the components of net pension benefit cost. C) The footnote must disclose assumptions used for discount rates and expected return on assets on a weighted average basis. D) Nonpublic entities must separately disclose the components of net pension benefit cost.

Which of the following areas is not an area that financial statements users seek to analyze in a company's defined benefit pension plan? A) funded status B) actuarial gains and losses in other comprehensive income C) settlement rate and return on plan asset assumptions D) future payout assumptions.

Which of the following statements about defined benefit pension plans is correct? A) Deferring actuarial gains and losses tends to smooth earnings. B) An overfunded pension plan increases a company's leverage. C) When the settlement rate is higher, the computed pension obligation increases. D) Expected return on plan assets increases pension costs.

Which of the following is not an element of pension cost that must be disclosed? A) actual return on plan assets B) service cost C) interest cost D) amortization of prior service cost

Which of the following statements regarding IFRS disclosures for defined benefit pension plans is incorrect? A) Most IFRS reporters classify the service cost component of pension cost in operating income. B) IFRS reporters must report interest costs and return on plan assets as a part of operating income. C) IFRS disclosures and reporting for defined benefit pension plans are similar to those for US GAAP. D) Under IFRS, a defined benefit pension plan may be viewed as borrowing from employees.

What is the primary difference in defined-benefit pension disclosures between U.S. GAAP and IFRS?