ADVANCED TOPICS IN FINANCIAL ACCOUNTING AND REPORTING (MODADV3)

UNIT 5 EMPLOYEE BENEFITS (IAS 19, IAS 26)

ESTIMATED TIME: 4 HOURS

Problem 1 Termination, short-term, long-term employee benefits

Acer Company had the following transactions for the year 20A1:
a. As of February 14, 20A1, Acer planned to close one of its operating segments. The plan was
approved by the board of directors on March 31, 20A1 and the segment will be closed on
January 31, 20A2. As indicated in the plan, 150 employees will be terminated and each
employee will receive a lump-sum amount of P120,000. Employees who wish to leave before the
closure will only receive 75% of the lump-sum amount. The decision to close the plant was also
announced to the employees on March 31 on the same date, and all employees accepted the
offer. It is estimated that 16% of the employees will leave before the closure of the plant and the
remaining employees will render services until the plant is closed. On September 28, 20A1, 15
employees left and were paid the amount due to them. A further 9 employees left on December
10, 20A1. The remainder left on the closure date and were paid the full amount due to them.
b. Acer provides the following non-taxable de minimis benefits to each of its 15 employees:
Medical cash allowance to dependents P750 per semester. No entry was made for the
2nd semester of 20A1.
Rice subsidy P1,500 per month. No entry was made for the
month of December.
Clothing allowance P1,250 per quarter. No entry was made for the
last quarter of 20A1.
Laundry allowance P300 per month. No entry was made for the
month of December
c. Acer provided fringe benefits in the form of free rentals of condominium units to its foreign
employees. Acer pays P500,000 monthly to the lessor payable at the first day of the subsequent
month. As per NIRC, only 50% of the rentals is subject to a 32% fringe benefits tax based on the
gross-up monetary value. No entry was made on December 31, 20A1 for the accrual of the
December rent.
d. Acer has a profit-sharing plan. Under this plan, Acer pays its employees additional bonus
equivalent to 3%-5% of its net profit depending on its performance. The bonus is payable to the
employees in March of the succeeding year. Only employees who have worked with Acer for two
years, as of December 31 of the current year, are entitled to the bonus. Acer has a net profit of
P20 million for the year ended December 31, 20A1. On January 5, 20A2, management decided
that a bonus of 3% of net profit will be paid to the employees on March 31, 20A2. The bonus is
subject to withholding tax. The estimated effective income tax rate of the employees is 20%.

Required: Provide all the journal entries for 20A1.

Problem 2 Short-term compensated absences

Ludwig Electronics, Inc. compensates its employees for certain employees. Each employee receives
10 days sick leave credits each year plus 15 days vacation leave credits. The benefits carry over for
2 years after the year of grant, after which the provision lapses on a FIFO basis. Thus, the maximum
accumulation is 50 days. The employees are not allowed to take vacations with pay in advance
without earning vacation leave credits.
Employee Days Accrued Daily Rate Days Earned Days Taken
Jan. 1, 20A1 Jan. 1, 20A1 20A1 20A1
Andrew 30 P1,200 25 35
Brad 25 1,500 25 20
Charles 20 1,100 12 12
Denise 5 1,000 25 20
Emma 45 1,400 25 15
Frank Hired July 1,250 13 6

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The daily rate on January 1, 20A1 already considers the salary increase implemented by Ludwig for
20A1. Ludwig grants a salary increase every January 1 of each ear. It is expected that the
employees daily rate will increase by 10% beginning January 1, 20A2. It is also expected that all
employees will take their leaves in 20A2.
Required:
1. Determine the accrued vacation and sick leave benefits as of January 1, 20A1, December 31,
20A1, the amount of used vacation and sick leave benefits in 20A1 and the vacation and sick
leave benefits expense for 20A1? Prepare all the necessary journal entries for 20A1
2. Assume that the sick and vacation leave credits are not allowed to be carried over in the
subsequent years (non-accumulating) and those taken were properly approved and granted.
Prepare all the journal entries for 20A1.

Problem 3 Defined contribution plan

Sapphire Corporation was incorporated on January 1, 20A1. It has a defined contribution plan that
covers all existing employees. The pension plan requires Sapphire to contribute 8% of annual
employees salaries to the retirement plan every year. The payroll record for 20A1 shows annual
salaries of P5,000,000. During 20A1, Sapphire contributed P300,000 to the pension plan.
During 20A2, the pension plan was amended. Sapphire is required to contribute 10% of the annual
employees salaries to the pension plan every year. The payroll record for 20A2 shows annual
salaries of P5,500,000. Sapphire contributed P700,000 to the pension plan during the same year.
Required:
1. Prepare all the journal entries for 20A1 and 20A2.
2. Determine the carrying amount of prepaid/accrued pension cost as of December 31, 20A1 and
December 31, 20A2.

Problem 4 Current service cost; interest cost; past service cost; lump sum pension payment;
annual pension payment; actuarial gains and losses
Sachs Brands maintains a defined benefit pension plan. Two of its employees are entitled to the
pension plan. The first employee, Angela Davenport, will be paid a lump sum amount equal to 5% of
final years salary for every year of service upon retirement. The second employee, Elijah Reeve, will
be paid an annual pension equivalent to 0.5% of the final years salary for every year of service
which is payable at the end of each year after retirement. His retirement is expected to span 10
years.
As of January 1, 20A1, the following information relates to the two employees:
Both employees have rendered service for 15 years each.
Both employees are being paid P1,000,000 each and is expected to increase by 8% annually.
Both employees are expected to retire after another 20 years.
Case A: The interest on high quality corporate bonds is 7% for 20A1 and 20A2.
Required:
1. How much is the projected benefit obligation (PBO) as of January 1, 20A1 with respect to
Angela?
2. How much is the projected benefit obligation (PBO) as of January 1, 20A1 with respect to Elijah?
3. Determine Sachs current service cost, interest cost, and the amount of pension cost to be
charged to profit or loss for the year ended December 31, 20A1.
4. How much is the projected benefit obligation (PBO) as of December 31, 20A1 with respect to
Angela?
5. How much is the projected benefit obligation (PBO) as of December 31, 20A1 with respect to
Elijah?
Case B: The interest on high quality corporate bonds is 7% for 20A1 and 20A2. On January 1, 20A2,
the pension formula related to Angela was amended. Under the amendment, an employee will be
paid a lump sum amount equal to 6% of final years salary for every year of service.
Required:
1. How much is the projected benefit obligation (PBO) as of January 1, 20A2 with respect to Angela
after the amendment?
2. How much is the past service cost as of January 1, 20A2?
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3. Determine Sachs current service cost, interest cost, and the amount of pension cost to be
charged to profit or loss for the year ended December 31, 20A2 with respect to Angela.
4. How much is the projected benefit obligation (PBO) as of December 31, 20A2 with respect to
Angela?

Problem 5 Fair value of plan assets; projected benefit obligation; settlement; amendment; changes
in actuarial assumptions
Herring Wholesale Company has a defined benefit pension plan. On January 1, 20A1, the following
pension-related data were available:
Projected benefit obligation P1,400,000
Fair value of plan assets 1,100,000
The actual return on the plan assets during 20A1 was 180,000 although it was expected to be 7%.
The actuary revised assumptions regarding the PBO on December 31, 20A1, resulting in a P25,000
increase in the estimate of that obligation. In addition, the market yield on high quality corporate
bonds is 10%, while the market yield for government bonds is 8%.
In addition, Herring Wholesale purchased an insurance policy during 20A1 for P400,000 in order to
transfer a portion of its obligation under the pension plan. The pension obligation has a present
value of P500,000.
Pension benefits paid during the year amounted to P200,000 to retirees and P150,000 to an
employee who opted to avail of his retirement benefits early. The PBO of the employee was carried
at P175,000. Herring Wholesale contributed P350,000 to the pension plan. Current service cost for
the year amounts to P300,000 and past service cost from plans amendment amounted to P100,000.
Required:
1. Determine the fair value of plan assets, projected benefit obligation and prepaid (accrued)
pension cost as of December 31, 20A1.
2. Calculate the defined benefit cost that will be charged to profit and loss, and other
comprehensive income for the year ended December 31, 20A1 and prepare all the journal
entries for 20A1.

Problem 6 Fair value of plan assets; projected benefit obligation; asset ceiling
The following are relevant information related to the pension cost of Bravia Company, Inc. at
January 1, 20A1:
Fair value of plan assets P6,000,000
Projected benefit obligation 4,200,000
Present value of available refunds and reductions in future contributions 1,100,000
Bravias actuary determined that the 20A1 current service cost is P600,000. The actual rate of return
on plan assets is 7%. The interest rate on high yield corporate bonds is 5%. Bravia contributed
P1,200,000 to the pension fund at the end of 20A1 and retirees were also paid P440,000 from the
plan assets. The present value of available refunds and reductions in future contributions as of
December 31, 20A1 amounted to P2,000,000.
Required:
1. Determine the fair value of plan assets, projected benefit obligation and pension asset (liability)
as of December 31, 20A1.
2. Determine the pension expense and remeasurement gain or loss for the year ended December
31, 20A1 and prepare all the necessary journal entries for 20A1.

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