DEBT RESTRUCTURING & RETIREMENT BENEFITS – Quiz Material

Items 1 and 2:

The following information pertains to the transfer of real estate pursuant to a troubled debt
restructuring by Knot Company to Ton Company in full liquidation of Knot’s liability to Ton:
Carrying amount of liability liquidated P150,000
Carrying amount of real estate transferred 100,000
Fair value of real estate transferred 90,000

1. What amount should Knot report as ordinary gain (loss) on transfer of real estate?
(a) (P10,000) (b) P 0 (c) P50,000 (d) P60,000 A

2. What amount should Knot report as pretax extraordinary gain (loss) on restructuring of
payables?
(a) (P10,000) (b) P 0 (c) P50,000 (d) P60,000 D

3. Style Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditors to relieve its financial stress. Style has a P2,500,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Style Company in the
form of 200,000 shares of common stock valued at P12 per share. The par value of
common is P10 per share. How much is the gain from the debt restructuring?
(a) P500,000 (b) P100,000 (c) P400,000 (d) P 0 D

4. On December 31, 2000, Fire Company was experiencing financial difficulties and entered
into a debt restructuring agreement with the creditor. The creditor restructured the
obligation as follows:
a. Reduced the principal note payable from P5,000,000 to P4,500,000.
b. Forgave P600,000 of accrued interest.
c. Extended the maturity date from December 31, 2000 to December 31, 2003.
d. Reduced the interest from 12% to 10%. Interest was payable annually on December
31, 2001, 2002 and 2003.
Fire should report loss on debt restructuring of:
(a) P250,000 (b) P850,000 (c) P500,000 (d) P 0 D

5. The past service costs in a pension plan:

(a) should be charged to income in the year of the inception of the pension plan.
(b) should be funded in the year of the inception of the pension plan.
(c) represent pension cost assigned to years prior to the current balance sheet date.
(d) represent pension cost assigned to years prior to the inception of the pension plan. D

6. Benefits under a pension plan that are not contingent upon an employee’s continuing
service are:
(a) granted under a plan of defined contribution. (c) actuarially unsound.
(b) based upon terminal funding. (d) vested. D

7. The vested benefits of an employee in a pension plan represent:

(a) benefits to be paid to the retired employee in the current year.
(b) benefits to be paid to the retired employee in the subsequent year.
(c) benefits accumulated in the hands of an independent trustee.
(d) benefits that are not contingent on the employee’s continuing service of the employer. D

8. For external reporting purposes, assuming an underfunded accumulated benefit obligation,

the liability that must be reported in the balance sheet is:
(a) projected benefit obligation less plan assets at fair value
(b) balance in accrued pension cost
(c) the underfunded accumulated benefit obligation
(d) additional minimum pension liability
9. Defined contribution plans and defined benefit plans are two common types of pension
plans. Choose the correct statement concerning these plans.
(a) the required annual contribution to the plan is determined by formula or contract in a
defined contribution plan
(b) both plans provide the same retirement benefits
(c) the retirement benefit is usually determinable well before retirement in a defined
contribution plan
(d) in both types of plans, pension expense is generally the amount funded during the year

10. Which of the following is not one of the six components of pension expense (or part of a
component)?
(a) initial transition asset
(b) amortization of unrecognized gain or loss
(c) actual return on plan assets
(d) growth (interest cost) in projected benefit obligation since the beginning of the period

11. Which of the following defined benefit pension plan disclosures should be made in a
company’s financial statements?
I. A description of the company’s funding policies and types of assets held
II. The amount of net periodic pension cost for the period
III. The fair value of the plan assets
(a) I and II (c) II and III
(b) I, II and III (d) I only

12. Interest cost included in the net pension cost recognized by an employer sponsoring a
defined benefit pension plan represents the:
(a) amortization of the discount on unrecognized prior service cost
(b) increase in the fair value of plan assets due to the passage of time
(c) increase in the projected benefit obligation due to the passage of time
(d) shortage between the expected and actual returns on plan assets

13. An employer sponsoring a defined benefit pension plan is subject to the minimum pension
liability recognition requirement. An additional liability must be recorded equal to the
unfunded:
(a) accumulated benefit obligation plus the previously recognized accrued pension cost
(b) accumulated benefit obligation less the previously recognized accrued pension cost
(c) projected benefit obligation plus the previously recognized accrued pension cost
(d) projected benefit obligation less the previously recognized accrued pension cost

14. The following data were obtained from the actuarial valuation reports of Sight Company on
January 1, 2002:
Actuarial accrued liability P5,000,000
Actuarial value of plan assets 4,600,000
Current service cost for 2002 500,000
Experience adjustment gain 300,000
Contribution to the plan in 2002 450,000
Interest on unfunded actuarial liability 10%
Remaining working lives of employees 15 years
What is the retirement benefits expenses for the year ended December 31, 2002?
(a) P450,000 (b) P520,000 (c) P700,000 (d) P480,000 B

15. Quebec Company adopted a defined benefit pension plan on January 1, 2002. Quebec
amortizes the past service cost over 16 years and funds past service cost by making equal
payments to the fund trustee at the end of each of the first ten years. The current service
cost is fully funded at the end of each year. The following data are available for 2002:

Current service cost for 2002 P220,000

Past service cost:
Amortized 83,400
Funded 114,400
Quebec’s prepaid pension cost at December 31, 2002 is
(a) P114,400 (b) P83,400 (c) P31,000 (d) P 0 C
16. Webb Company implemented a defined benefit plan for its employees on January 1, 2002.
During 2002 and 2003, Webb’s contributions fully funded the plan. The following data are
provided for 2004 and 2005:
2005 estimated 2004 actual
Projected benefit obligation, 12/31 P7,500,000 P7,000,000
Accumulated benefit obligation, 12/31 5,200,000 5,000,000
Plan assets at fair value 6,750,000 6,000,000
Projected benefit obligation
in excess of plan assets 750,000 1,000,000
Retirement benefit expense 900,000 800,000
Employer’s contribution ? 500,000

What amount should Webb Company contribute in order to report an accrued liability for
retirement benefit cost of P200,000 in its December 31, 2005 balance sheet?
(a) P1,000,000 (b) P700,000 (c) P600,000 (d) P500,000 A

17. The following information pertains to Lila Corporation’s defined benefit plan for 2003:
Service cost P160,000
Actual and expected gain on plan assets 35,000
Unexpected increase in projected benefit
obligation incurred during 2003 40,000
Amortization of unrecognized prior service
cost 5,000
Annual interest on pension obligation 50,000
What amount should Lila report as pension expense in its 2003 income statement?
(a) P250,000 (b) P220,000 (c) P210,000 (d) P180,000

18. Nice Company sponsors a defined benefit plan covering all employees. Benefits are based
on years of service and compensation levels at the time of retirement. Nice determined that
as of September 30, 2003, its accumulated benefit obligation was P380,000 and its plan
assets had a P290,000 fair value. Nice’s September 30, 2003 trial balance showed prepaid
pension cost of P20,000. As of September 30, 2003, what is the balance of additional
minimum pension liability?
(a) P110,000 (b) P360,000 (c) P90,000 (d) P400,000

19. On June 1, Jay Corporation established a defined benefit pension plan for its employees.
The following information was available on May 31, 2003:
Projected benefit obligation P3,625,000
Accumulated benefit obligation 3,000,000
Unfunded accrued pension cost 50,000
Plan assets at fair market value 1,750,000
Unrecognized prior service cost 637,500
To report the proper pension liability in Jay’s May 31, 2003 balance sheet, what is the
required balance in additional minimum pension liability?
(a) P562,500 (b) P1,187,500 (c) P1,200,000 (d) P1,825,000

20. Information for a pension plan follows:

Unrecognized gain, 1/1/2003 P8,000
Years used to amortize unrecognized gain or loss 10
Fair value of plan assets, 1/1/2003 200,000
Expected rate of return on plan assets 12%
Fair value of plan assets, 12/31/2003 220,000
2003 funding 40,000
Benefits paid in 2003 32,000
Actuarial loss computed in 12/31/2003 8,000
How much is the net unrecognized (gain) or loss at January 1, 2004?
(a) (P8,000) (b) (P4,800) (c) P12,800 (d) 20,800

21. Royal Corporation initiated a defined benefit pension plan on January 1, 2003. The plan
does not provide any retroactive benefits for existing employees. The pension funding
payment is made to the trustee on December 31 each year. The following information is
available for 2003 and 2004:
2003 2004
Service cost P75,000 P82,500
 Funding payment (contribution) 85,000 92,500
Interest on projected benefit obligation 7,500
Actual return on plan assets 9,000
In its December 31, 2004 balance sheet, Royal should report what amount of prepaid
pension cost?
(a) P11,500 (b) P81,000 (c) P10,000 (d) P85,000

Items 22 to 24:
The 2003 records of Jet Company provided the following data related to its
noncontributory, defined benefit pension plan (amounts in P000s):
a. Projected benefit obligation (report as actuary):
Balance, January 1, 2003 P3,000
Service cost 1,200
Interest cost 240
Pension benefits paid ( 400)
Balance, December 31, 2003 P4,040
Discount rate used by actuary, 8 percent.
b. Plan assets at fair value (report of trustee):
Balance, January 1, 2003 P2,408
Actual return on plan assets 168
Contributions, 2003 1,016
Pension benefits paid, 2003 ( 400)
Balance, December 31, 2003 P3,192
Expected long-term rate of return on plan assets, 7 percent.
c. January 1, 2003 balance of unrecognized prior service cost, gains and losses, and
transaction cost, zero.

22. How much is the 2003 net periodic pension expense?

(a) P 0 (b) P1,200 (c) P1,272 (d) P1,440

23. How much is accrued pension cost?

(a) P256 (b) P1,106 (c) P 0 (d) P1,272

24. How much is the amount of underfunded projected benefit obligation at the end of 2003?
(a) P592 (b) P 0 (c) P848 (d) P256