POST EMPLOYMENT BENEFITS P2

1. Entity B, a trustee, undertakes to manage the retirement benefit fund of Entity A for the
benefit of Entity A’s employees. When reporting to Entity A regarding the status and
performance of the fund, Entity B would most likely apply which of the following standards?
a. PAS 19
b. PAS 24
c. PAS 26
d. PFRS 6
Reference: CFAS by Millan

2. Which of the following statements is correct?

a. A pension plan is contributory when the employer makes payments to a funding agency.
b. An employer reports no liability on its balance sheet in a defined-contribution plan.
c. Employers are at risk with defined-benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
d. The accounting for defined contribution plans is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of actuarial gains
and losses
Reference: Millan book

3. An entity has decided to improve its defined benefit pension scheme. The benefit payable will
be determined by reference to 60 years’ service rather than 80 years’ service. As a result, the
defined benefit pension liability will increase by ₱10 million. The average remaining service lives
of the employees is 10 years. How should the increase in the pension liability by ₱10 million be
treated in the financial statements?
a. The past service cost should be charged against retained profit.
b. The past service cost should be charged against profit or loss for the year.
c. The past service cost should be spread over the remaining working lives of the employees.
d. The past service cost should not be recognized.

4. On January 1, 2002, Crowther Co. has estimated a present value of defined benefit
obligation of ₱440,000 based on a settlement rate of 12 percent. Pension benefits paid to
retirees totaled ₱60,000. Service costs for 2002 amounted to ₱148,000. The fair values of the
plan assets were ₱350,000 and ₱400,000 on December 31, 2001 and December 31, 2002,
respectively. The present value of the benefit obligation on December 31, 2002 was

a. 528,000. b. 580,800. c. 630,800. d. 640,800.

Solution:
PBO ending = PBO beg. + Service cost + interest cost – pension benefits paid to
retirees
440,000 + 148,000 + 52,800 (440k x .23) – 60,000 = 580,800
5. The following information relates to the defined benefit pension plan for the McDonald Company for
the year ending December 31, 2002.
Present value of defined benefit obligation,Jan. 1 4,600,000
Present value of defined benefit obligation,Dec. 31 4,729,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Return on plan assets 450,000
Employer contributions 425,000
Benefits paid to retirees 390,000
Discount rate 10%

Current service cost for the year would be

a. 59,000. b. 94,000. c. 129,000. d. 390,000.

Solution:
Present value of DBO – Jan 1 4,600,000
Interest cost (4.6M x 10%) 460,000
Less: Benefits paid 390,000
4,670,000
Add: Current service cost 59,000
4,729,000

6. The following information relates to Irasly Inc. at December 31, 2002:

Fair value of plan assets 1,520,000
Market related asset value 1,440,000
Present value of defined benefit obligation 1,960,000
Projected benefit obligation 2,040,000
Past service cost (recognized in full during the
period) 24,000
Prepaid/accrued pension cost 0

The net defined benefit liability at December 31, 2002, for Irasly Inc. is
a. 0. b. 440,000. c. 480,000. d. 520,000.
Solution:
FV 1,520,000
PV of DBO 1,960,000
Net defined benefit liability (440,000)

7. The following information is taken from the actuarial valuation report for an entity’s defined benefit
plan:
Fair value of plan assets, Jan. 1 2,100,000
Present value of defined benefit obligation, Jan. 1 2,400,000
Past service cost (vesting period is 5 yrs.) 300,000
Current service cost 600,000
Benefits paid to retirees during the year 450,000
Net gain on settlement of plan during the year 60,000
Actuarial gain during the period 15,000
Return on plan assets during the period 270,000
Discount rate based on high quality corporate bonds 12%
How much is the defined benefit cost?

a. 843,000 c. 876,000
b. 861,000 d. 879,000

Solution:
Current SC 600,000
Past SC 300,000
(Gain) (60,000)
840,000
Interest cost on DBO (2.4M x .12) 288,000
Interest income on plan asset (2.1M x .12) (252,000)
36,000
Actuarial gain (15,000)
Diff. of interest income on plan asset and Return of plan
asset (252,000-270,000) (18,000)
(33,000)
Total DBO 843,000

Use the following information for the next two questions:

Information on STATUTE LAW Co.’s defined benefit plan is shown below:

● The fair value of the plan assets on January 1, 20x1 was ₱7,200,000.
● The actuarial valuation of the defined benefit obligation on January 1, 20x1 was ₱8,000,000.
The actuarial present value of future benefits earned by employees for services rendered in
20x1 amounted to ₱1,200,000.

● On July 1, 20x1, STATUTE Co. amended its retirement plan. The amendment increased the
present value of the defined benefit obligation by ₱1,600,000, 20% of which relates to benefits
that have already vested. The remaining portion will vest in 5 years.

● Changes in actuarial assumptions resulted to a decrease of ₱640,000 in the present value of

the defined benefit obligation. It was also determined that there was an ₱80,000 decrease in
the fair value of the plan assets due to changes in fair values.

● The return on plan assets amounting to ₱1,120,000 represents only the actual interest and
other investment income in 20x1.

● Benefits paid during 20x1 amounted to ₱200,000. No contributions were made to the fund
during 20x1.
●
● The discount rate is 9%.

8. How much is the net defined benefit liability (asset) on December 31, 20x1?
a. 1,040,000 asset c. 2,640,000 liability
b. 1,040,000 liability d. 2,640,000 asset
Solution:
Fair value of plan assets:
Debit side – 7,200,000 + 1,200,000 + 1,120,000 = 9,520,000
Credit side – 200,000
Final: 9,520,000 – 200,000 = 9,320,000

Present value of DBO

Debit – 1,200,000 + 640,000 + 200,000 =2,040,000
Credit – 8,000,000 + 1,600,000 + 720,000 ( 8M x .09) =10,320,000
Final: 10,320,000 – 2,040,000 = 8,280,000
Net defined benefit = 9,320,000 – 8,280,000 = 1,040,000 asset

9. What amounts of the total defined benefit cost for the period are recognized in increase/(decrease)
Profit or loss OCI

a. 2,624,000 248,000
b. 2,764,000 (248,000)
c. 2,872,000 (1,032,000)
d. 2,872,000 1,032,000

[Link] January 1, 20x1, BESET TO TROUBLE Co. had the following information regarding its defined
benefit plan:
Fair value of plan assets (FVPA), Jan. 1 ₱480,000
Present value of the defined benefit obligation, Jan. 1 360,000
Discount rate based on high quality corporate bonds 5%

Information regarding the defined benefit plan as of December 31, 20x1 is as follows:

Contributions made to the fund, July 1, 20x1 800,000

Benefits paid to retirees, September 30, 20x1 200,000
Fair value of plan assets (FVPA), Dec. 31 1,128,000
Present value of the defined benefit obligation, Dec. 31 720,000

How much is the remeasurement to the net defined benefit liability (asset) to be recognized in other
comprehensive income?
a. 5,000 loss c. 6,500 loss
b. 5,000 gain d. 6,500 gain
Part I: Conceptual: Multiple Choice

1. Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for obligations
related to product warranties. The amount of the loss involved can be reasonably estimated.
Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.

2. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

3. Accrued liabilities are disclosed in financial statements by

a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.

4. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.

5. In December 20x1, Mill Co. began including one coupon in each package of candy that it
sells and offering a toy in exchange for 50 centavos and five coupons. The toys cost Mill 80
centavos each. Eventually 60% of the coupons will be redeemed. During December, Mill sold
110,000 packages of candy and no coupons were redeemed. In its December 31, 20x1,
balance sheet, what amount should Mill report as estimated liability for coupons?
a. 3,960
b. 10,560
c. 19,800
d. 52,800

6. Which of the following is the proper way to report a probable contingent asset?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.

7. Contingent assets need not be disclosed in the financial statements or the notes thereto if
they are considered?
a. Virtually certain.
b. Probable.
c. Likely.
d. Possible but not probable.

8. A contingent liability
a. always exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not probable.
c. is always the result of a loss contingency.
d. is not reported as a liability if not probable.

9. Which of the following is the proper way to report a contingent asset considered probable?
a. As an asset.
b. As deferred revenue.
c. As a disclosure only.
d. No disclosure or accrual required.

10. Which of the following is the proper way to report a contingent asset, receipt of which is
virtually
certain?
a. As an asset.
b. As unearned revenue.
c. As a disclosure only.
d. No disclosure or accrual required.

11. Provisions are contingent liabilities which are accrued because the likelihood of an
unfavorable outcome is
a. virtually certain.
b. greater than 50%.
c. at least 75%.
d. Possible.

12. Examples of contingent assets include all of the following except:

a. Unrealized gain on the sale of investments.
b. Pending lawsuit with a favorable outcome.
c. Tax refund disputed by the government but with a possible favorable outcome.
d. Promise of land to be donated by city as an enticement to move manufacturing facilities.

13. During 2014, Vanpelt Co. introduced a new line of machines that carry a three-year warranty
against manufacturer’s defects. Based on industry experience, warranty costs are estimated at
2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale.
Sales and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures

2014 $600,000.00 $9,000.00
2015 $1,500,000.00 $45,000.00
2016 $2,100,000.00 $135,000.00
$4,200,000.00 $189,000.00

What amount should Vanpelt report as a liability at December 31, 2016?

a. $0
b. $15,000
c. $204,000
d. $315,000
14. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3
box tops from Palmer Frosted Flakes boxes and $1.00. The company estimates that 60% of the
box tops will be redeemed. In 2015, the company sold 675,000 boxes of Frosted Flakes and
customers redeemed 330,000 box tops receiving 110,000 bowls. If the bowls cost Palmer
Company $2.50 each, how much liability for outstanding premiums should be recorded at the
end of 2015?
a. $25,000
b. $37,500
c. $62,500
d. $87,50

15. Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Mott $2.00 each. Mott estimates that 40 percent of
the coupons will be redeemed. Data for 2014 and 2015 are as follows:
2014 2015
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed $120,000.00 $150,000.00

16. The premium expense for 2014 is

a. $25,000.
b. $30,000.
c. $35,000.
d. $50,000.

17. The premium liability at December 31, 2014 is

a. $7,500.
b. $10,000.
c. $17,500.
d. $20,000.

18. 124. The premium liability at December 31, 2015 is

a. $11,250.
b. $21,250.
c. $22,500.
d. $42,500.

19. Winter Co. is being sued for illness caused to local residents as a result of negligence on the
company's part in permitting the local residents to be exposed to highly toxic chemicals from its
plant. Winter's lawyer states that it is probable that Winter will lose the suit and be found liable
for a judgment costing Winter anywhere from $1,200,000 to $6,000,000. However, the lawyer
states that the most probable cost is $3,600,000. As a result of the above facts, Winter should
accrue
a. a loss contingency of $1,200,000 and disclose an additional contingency of up to
$4,800,000.00
b. a loss contingency of $3,600,000 and disclose an additional contingency of up to
$2,400,000.00
c. a loss contingency of $3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000.

20. It is an existing liability of uncertain amount or uncertain timing.

a. Contingent liability
b. Unearned income
c. Discount on note payable
d. Provision

21. A provision is recognized in the statement of financial position under which of the following
requirements?
I. An enterprise has a present obligation, legal or constructive, as a result of a past event.
II. It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.
III. A reliable estimate can be made of the amount of the obligation.
a. I, II and III
b. II and III
c. I only
d. II only

22. A provision shall be recognized as liability if it satisfies all of the following criteria, except
a. The amount of the obligation can be measured reliably.
b. It is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation.
c. It is possible that an outflow of resources embodying economic benefits will be required to
settle the obligation.
d. The entity has a present obligation as a result of a past even

23. A constructive obligation is an obligation

I. Arising from contract, legislation or operation of law.
II. That is derived from an enterprise s action that the enterprise will accept certain
responsibilities because of past practice, published policy or current statement and as a result,
the enterprise has created a valid expectation in other parties that it will discharge those
responsibilities.
a. Both I and II
b. Neither I nor II
c. I only
d. II only

24. Elgor Company sells merchandise with a one year warranty. In 2007, sales consisted of
2,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the
repairs will be made in 2007 and 70% in 2008. In the 2007 income statement, Elgor should
show warranty expense of
a. $7,500
b. $17,500
c. $25,000
d. $0

25. Pilgrim Company sells merchandise with a one year warranty. In 2007, sales consisted of
1,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the
repairs will be made in 2007 and 70% in 2008. In the 2007 income statement, Pilgrim should
show warranty expense of
a. $4,500
b. $10,500
c. $15,000
d. $0
26. During June, CircuitSound sold 800 portable CD players for $50 each. Each CD player cost
CircuitSound $25 to purchase and carried a one-year warranty. If 10 percent typically need to
be replaced over the warranty period, what amount should CircuitSound debit Product Warranty
Expense for in June?
a. $4,000
b. $400
c. $2,000
d. $1,000

27. In December 2016, Cucumber Company began including one coupon in each package of
goodies that it sells and offering a pen in exchange for P30 and three coupons. The pens cost
P60 each. Eventually, 70% of the coupons will be redeemed. During December, the entity sold
120,000 packaged of goodies and no coupons were redeemed. On December 31, 2016, what
amount should be reported as estimated liability for coupons?
a. 1,200,000
b. 840,000
c. 1,680,000
d. 2,400,000

28. At the beginning of the current year, Masigasig Company began marketing a bottled
chocolate called ChocoMoTo. To help promote the product, the management is offering a
special ChocoMoTo mug to each customer for every 10 marked bottle cops of ChocoMoTo. The
entity estimated that out of the 250,000 bottles of ChocoMoTo sold during the year, only 80% of
the marked bottle cops would be redeemed. During the year, the entity purchased 10,000 mugs
at a total cost of P400,000 and already distributed 15,000 mugs to customers. What is the
premium liability at year-end?
a. 200,000
b. 800,000
c. 400,000
d. 600,000

29. On July 1, 2016, Xilam Company began offering a new product for sale under one-year
warranty. Of the 60,000 units in inventory on July 1, 2015, 40,000 had been sold by September
30, 2016. Based on its experience with similar products, the entity estimated that the average
warranty cost per unit sold would be P90. Actual warranty costs incurred from Jul 1 through
September 31, 2016 amounted to P800,[Link] September 31, 2016, what is the estimated
warranty liability?
a. 2,600,000
b. 1,800,000
c. 2,800,000
d. 4,400,000

30. Mayday Company introduced a new product that carried a 2-year warranty against defects.
The estimated warranty cost related to sales is 4% in the year of sale and 5% in the year after
sale. Sales are P3,800,000 for 2016 and P 4,500,000 for 2017. Actual warranty expenditures
are P150,000 for 2016 and P400,000 for [Link] amount should be reported as estimated
warranty liability of December 31,2017?
a. 377,000
b. 197,000
c. 192,000
d. 0
31. Diego Company sells its only line product at average selling price of P500 per unit. To
promote its sales, a gift item is offered to customers on the return of 5 empty containers as proof
of purchase, plus remittance of P50. The cost of gift item is P150/pc., and it is estimated that
80% of the proof of purchase will be redeemed. For the current year, Diego Company’s total
sales for the product amounted to P6,000,000, of which actual containers redeemed
were7,[Link] much of the estimated liability for premium payable should be reported in its
current year’s end balance sheet?
a. 20,000
b. 40,000
c. 60,000
d. 240,000

32. In June 2016, the Hiloma Company began producing and selling a new line of dishwasher.
By the end of the year, it has sold 120,000 to various dealers for 150,000 each. The product
was sold under a 1-year warranty, and the company estimates warranty costs to be P750 per
dishwasher. Hiloma had paid out P30 Million in warranty expenses as of December 31, 2016,
which is also the amount shown as warranty expense in its income statement for the current
[Link] amount of warranty expense should be shown on Hiloma’s income statement for the
year ended December 31, 2016?
a. P30,000,000
b. P0
c. P60,000,000
d. P90,000,000

33. On November 25, 2014, an explosion occurred at a Tom Company plant causing extensive
property damage to area buildings. By March 10, 2015, claims had been asserted against the
entity. The management and counsel concluded that itis probable that the entity would be
responsible for damages, and thatP2,500,000 is a reasonable estimate of the liability. Tom’s
P10,000,000comprehensive public liability policy has a P500,000 deductible clause. What
should be reported in the December 31, 2014 financial statements, issued on March 25, 2015,
in relation to this item?
a. An accrued liability of P500,000
b. A disclosure indicating the probable loss of P2,500,000
c. A footnote disclosure indicating the probable loss of P500,000
d. An accrued liability of P2,500,000

34. During 2014, Steel Company became involved in a tax dispute with the BIR. on December
31, 2014, the tax advisor believed that an unfavorable outcome was probable and a reasonable
estimate of additional taxes was P300,000. After the2014 financial statements were issued, the
entity received and accepted a BIR settlement offer of P400,[Link] amount of accrued
liability should have been reported on December 31,2014?
a. 300,000
b. 400,000
c. 500,000
d. 0

35. On November 1, 2014, Tower Company was awarded a judgment of P1,200,000 in

connection with a lawsuit. The decision is being appealed by the defendant and it is expected
that the appeal process will be completed by the end of [Link] attorney believed that it is
highly probable that an award will be upheld on appeal but that the judgment may be reduce by
25%. What amount should be reported as a receivable on December 31, 2014?
a. 300,000
b. 1,200,000
c. 900,000
d. 0

36. During 2015, South Company filed suit against North Company seeking damages
for patent infringement. On December 31, 2015, South’s legal counsel believed that it was
probable that South would be successful against North for an estimated amount of P2,000,000.
In March 2016, South was awardedP1,300,000 and received full payment thereof. In South’s
2015 financial statements issued February 2016, how should this award be reported?
a. As a receivable and deferred revenue of P1,300,000
b. As a receivable and revenue of P1,300,000
c. As a disclosure of a contingent asset of P2,000,000
d. As a disclosure of a contingent asset of P1,300,000

37. During 2015, Iriga Company is the defendant a breach of patent lawsuit. The lawyers
believe there is an 70% chance that the court will not dismiss the case and the entity will incur
outflow of benefits. If the court rules in favor of the claimant, the lawyers believe that there is a
60%chance that the entity will be required to pay damages of P1,000,000 and a 40%chance
that the entity will be required to pay damages of P500,000. Other amounts of damages
are unlikely. The court is expected to rule in late December 2016. There is no indication that the
claimant will settle out of court. A 8% risk adjustment factor to the cash flows is considered
appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate
is 12% per year. What is the measurement of the provision on December 31, 2015?
a. 865,080
b. 605,556
c. 801,000
d. 560,700

38. On January 1, 2014, Ranger Company owned a machine with cost ofP2,500,000. The
accumulated depreciation was P1,500,000 estimated residual value was P150,000 and fair
value was P3,500,000. On January 3, 2014, this machine was irreparably damaged by Dean
Company and became worthless. In October 2014, a court awarded damages of P3,500,000
against Dean in favor of Ranger. On December 31, 2014, the final outcome of this case was
awaiting appeal and was therefore uncertain. However, in the opinion of Ranger’s attorney,
Dean’s appeal would be denied. On December 31, 2014, what amount of gain should be
accrued?
a. 150,000
b. 350,000
c. 250,000
d. 0

39. According to PAS 37, contingent liabilities are

a. recognized and disclosed.
b. always disclosed.
c. disclosed only, if their expected occurrence is probable
d. not disclosed if their expected occurrence is remote.
40. Which of the following statements is correct?
a. A provision is recognized only when it represents a present obligation.
b. An event or transaction that meets both the “probable outflow of economic benefits” and
“reliable measurement” criteria is always recognized.
c. A contingent asset that is possible is ignored.
d. A contingent liability that is possible is ignored