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CHAPTER 6

EMPLOYEE BENEFITS

PROBLEMS

6 1. (Red Hot Company) Correction: Headings of the given data, as well as requirement (a) should
be 2014, not 2013.

(a) Beginning liability for compensated absences


6 x 420 = P2,520

(b) Employee Benefit Expense for Sick Leave and Vacation Leave
Sick Leave 5 x P450 P2,250
10 x 420 4,200
2 x 400 800
2 x 380 760 P8,010
Vacation Leave 12 x P450 P5,400
12 x 420 5,040
2 x 400 800
5 x 380 1,900 13,140
Total P21,150

(c) Liability for Compensated Absences 2,520


Employee Benefit Expense Compensated Absences 10,280
Cash 12,800
Total amount paid for compensated absences
Sick leave (as computed above) 8,010
Vacation leave 7 x 450 3,150
3 x 420 1,260
1 x 380 380 4,790
12,800

(d) Employee Benefit Expense Compensated Absences 10,870


Liability for Compensated Absences 10,870
Liability for Compensated Absences, 12/31/14
Employee Unused Vacation Days Rate Amount
A. B. Santos 12-7 5 P450 P2,250
C. D. Garcia 12+6 -3 15 420 6,300
E. F. Cruz 2 2 400 800
G. H. Buen 51 4 380 1,520
Total P10,870

6-2. (Green Grass Company)


(a) Total payment in 2014
35 x 12 x 450 P189,000
25 x 10 x 450 112,500 P301,500
Liability, beginning of 2014 (13-10) x 20 x 450) (27,000)
Liability, end of 2014 (12 10) x 40 x 450) 36,000
Sick leave expense in 2014 P310,500
(b) P36,000 (see above)
Chapter 6 Employee Benefits

(c) Liability for Compensated Absences 27,000


Compensated Absences 27,000
Compensated Absences 301,500
Cash 301,500
Compensated Absences 36,000
Liability for Compensated Absences 36,000
6-3. (McKinley Company)
(a) Vacation earned for work in 2014 P400,000
Adjustment for 10% salary increase on unused vacation at
beginning of year 10% x (500,000 300,000) 20,000
Vacation pay expense for year 2014 P420,000

(b) Liability for accumulated vacations, 12/31/13 P500,000


Vacations taken during 2014 (300,000)
Vacation pay expense for 2014 420,000
Liability for accumulated vacations, 12/31/14 P620,000

6-4. (Blue Jeans Company)


(a) Retirement Benefit Expense = Required Contribution
= (P6,000,000 x 8%) + (35,000,000 - P10,000,000) x 5% =P1,730,000

(b) 1. Retirement Benefit Expense 1,730,000


Prepaid Retirement Benefit Cost 70,000
Cash 1,800,000

2. Retirement Benefit Expense 1,730,000


Cash 1,500,000
Accrued Retirement Benefit Cost 230,000

6-5. (Yellow Ribbon Trading)


Defined Benefit Cost Benefit Liability (Asset)
Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances P3,000,000 P2,600,000
Current service cost P1,000,000 1,000,000
Interest cost
10% x 3,000,000 300,000 300,000
10% x 2,600,000 (260,000) 260,000
Actuarial gain or loss
Benefit obligation 100,000 100,000
Plan assets
300,000 -260,000 (40,000) 40,000
Benefits paid (350,000) (350,000)
Contributions 900,000
Ending balances 1,040,000 60,000 4,050,000 3,450,000

(a) Net Prepaid/Accrued Benefit Cost, December 31, 2013


P3,000,000 P2,600,000 = P 400,000

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Chapter 6 Employee Benefits

(b) Retirement benefit expense in 2014 P 1,040,000

(c) Defined benefit cost taken to OCI P 60,000

(d) Retirement Benefit Expense 1,040,000


Remeasurement of Defined Benefit Asset/
Liability OCI 60,000
Cash 900,000
Defined Benefit Liability/Asset 200,000

(e) Benefit Obligation P4,050,000


Plan Assets 3,450,000

(f) Net defined benefit liability/asset:


Beginning balance P400,000 liability
Underfunding (see entry d) 200,000
Ending balance P600,000 liability

Reconciled with the memorandum records:


Defined benefit obligation P4,050,000
Plan assets 3,450,000
Net liability P 600,000

6-6. (Midnight Black)


Defined Benefit Cost Benefit Liability (Asset)
Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Balances, beginning 1,350,000 1,250,000
Service cost 2,000,000 2,000,000
Interest cost
9% x 1,350,000 121,500 121,500
9% x 1,250,000 (112,500) 112,500
Actuarial loss
On benefit obligation 50,000 50,000
On plan assets 2,000 (2,000)
Past service cost 300,000 300,000
Benefits paid (120,000) (120,000)
Contributions 2,360,000
Balances, end 2,309,000 52,000 3,701,500 3,600,500

(a) Retirement Benefit Expense 2,309,000


Remeasurement of Defined Benefit
Liability/Asset 52,000
Cash 2,360,000
Defined Benefit Liability/Asset 1,000

(b) Defined benefit liability, end


Beginning balance (1,350,000 1,250,000) P100,000
Underfunding 1,000
Defined benefit liability, end P101,000

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Chapter 6 Employee Benefits

Or P3,701,500 P3,600,500 = P101,000

6-7. Brown Cup


Defined Benefit Cost Benefit Liability (Asset)
Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 8,200,000 8,500,000
Current service cost 1,200,000 1,200,000
Interest cost
10% x 8,200,000 820,000 820,000
10% x 8,500,000 (850,000) 850,000
Actuarial gain or loss
On Benefit Obligation (40,000) (40,000)*
On Plan Assets
780,000-850,000 70,000 (70,000)
Contribution 1,500,000
Ending balances 1,170,000 30,000 10,180,000 10,780,000
*Squeezed
(a) P8,200,000 P8,500,000 P300,000 asset

(b) Actuarial gain or loss


On plan assets 780,000 850,000 70,000 loss
On benefit obligation (squeezed, see above) 40,000 gain

(c) Defined Benefit Cost


In profit or loss 1,170,000
In other comprehensive income 30,000

(d) Retirement Benefit Expense 1,170,000


Remeasurement of Defined Benefit
Asset/Liability OCI 30,000
Defined Benefit Liability/Asset 300,000
Cash 1,500,000

(e) Defined Benefit Asset:


Beginning balance P300,000
Overfunding (1,500,000 1,200,000) 300,000
Ending balance asset P600,000

(f) Remeasurement of Defined Benefit


Asset/Liability OCI 50,000
Defined Benefit Asset/Liability 50,000

6-8. (White Flower Company)


(a) Fair value of plan asset, ending P4,950,000
Fair value of plan assets, beginning P4,600,000
Contributions to the plan 500,000
Benefits paid (700,000)
Balance, before actual return P4,400,000
Actual return on plan assets P 550,000

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Chapter 6 Employee Benefits

(b) Actual return P 550,000


Expected return based on interest rate of 10%
10% x P4,600,000 460,000
Actuarial gain taken to OCI P 90,000

6-9. (Orange Gem Company)


(a) Worksheet
Defined Benefit Cost Benefit Liability (Asset)
Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 9,000,000 8,000,000
Current service cost 1,000,000 1,000,000
Interest cost
10% x 9,000,000 900,000 900,000
10% x 8,000,000 (800,000) 800,000
Actuarial gain/loss
Benefit obligation (50,000)* (50,000)*
Plan assets
(640,000-800,000) 160,000 (160,000)
Benefits paid (600,000) (600,000)
Contributions 2,000,000
Past service cost 800,000 800,000
Ending balances 1,900,000 110,000 11,050,000 10,040,000
*squeezed
(b) Retirement Benefit Expense 1,900,000
Remeasurement of Defined Benefit
Liability/Asset OCI 110,000
Defined Benefit Liability/Asset 2,010,000

Defined Benefit Liability/Asset 2,000,000


Cash 2,000,000

(c) Defined Benefit Liability/Asset, Dec. 31, 2014


Beginning balance (9,000,000 8,000,000) P1,000,000
Underfunding (2,010,000 2,000,000) 10,000
Defined benefit liability, Dec. 31, 2014 P1,010,000

(d) Or 11,050,000 10,040,000 P1,010,000

MULTIPLE CHOICE QUESTIONS


Theory
MC1 C MC6 A MC11 D
MC2 B MC7 A MC12 A
MC3 A MC8 A MC13 C
MC4 D MC9 A MC14 B
MC5 D MC10 D MC15 A
MC16 B
Problems
MC17 B 140,000 + 9%(3,200,000) 9%(3,000,000) = 158,000
MC18 D 185,000 270,000 = 85,000; 85,000 + 20,000 = 105,000 loss

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Chapter 6 Employee Benefits

MC19 C 158,000 +105,000 = 263,000 total retirement benefit cost


263,000 204,000 = 59,000 underfunding;
200,000 beg. Liability + 50,000 underfunding = 259,000
MC20 A 3,200,000 2,500,000 + 800,000 340,000 = 240,000
MC21 B 240,000 (10% x 2,500,000) = 10,000 loss
MC22 B 5,000,000 3,800,000 = 1,200,000 liability
MC23 A Full amount of past service cost is recognized as expense
MC24 A Actuarial gain or loss is taken to other comprehensive income, not in profit or loss
MC25 B 600,000 + 580,000 + 12%(5,000,000 3,800,000) = 1,324,000
MC26 C 3,800,000 + 550,000 + 750,000 = 5,100,000
MC27 D ABO= 5,000,000 + 600,000 + 580,000 + 12% (5,000,000) 70,000 = 6,710,000
MC28 B Total retirement benefit cost = 1,324,000 70,000 (550,000-456,000) = 1,160,000;
1,160,000 750,000 = 410,000 underfunding
MC29 D ABO= 6,710,000; PA = 5,100,000; 6,710,000 5,100,000 =1,610,000
MC30 C Actuarial loss on plan assets = 5,565,000 (5,035,000+503,500 + 425,000 390,000)
= 8,500
Actuarial gain on benefit obligation = 32,500 + 8,500 = 41,000
Service cost = 5,629,000 (4,600,000 + 460,000 - 41,000 390,000) =1,000,000 (or
prepare worksheet and squeeze)
MC31 A 503,500 8,500 = 495,000
MC32 A 1,000,000 + 460,000 503,500 32,500 = 924,000
MC33 A 600,000 240,000 = 360,000 (Current service cost is fully funded, so the
underfunding arises from past service cost.)
MC34 C 4,400,000 + 12%(4,400,000) + 1,480,000 50,000 - 600,000 = 5,758,000
MC35 D 2,400,000 + 300,000 2,500,000 = 200,000 liability
MC36 C 4,200,000 3,300,000 = 900,000 asset; however, the asset amount is limited by the
present value of future refunds and reductions in future contributions of P500,000;
so the defined benefit asset will be shown at P500,000 only.

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