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Employee Benefits Part 2

1. The following information relates to the defined benefit pension plan of the McDonald Company for the year ending
December 31, 2002:
PV of defined benefit obligation, January 1 ₱4,600,000
PV of defined obligation, December 31 4,729,000
Fair value of plan assets, January 1 5,035,000
Fair value of plan assets, December 31 5,565,000
Interest income on plan assets 450,000
Actuarial loss 32,500
Employer contributions 425,000
Benefits paid to retirees 390,000
Discount rate 10%

Compute for the net amount of remeasurement of the net defined benefit liability (asset) that should be included in the defined benefit
cost for 2002.

2. Flash Inc. has a defined benefit plan for its employees. The following information relates to this plan:
Present value of defined benefit obligation, January 1, 2002 10,000,000
Fair value of plan assets, January 1, 2002 10,400,000
Service cost - 2002 800,000
Actual return on plan assets - 2002 900,000
Discount rate based on high quality corporate bonds 10%
Expected rate of return on assets 8%

An actuarial loss of ₱20,000 was incurred during 2002. There was no unrecognized prior service cost or unrecognized gains or losses.
Compute Flash's defined benefit cost for the year and give the journal entry to recognize such.

3. Information on EQUANIMITY COMPOSURE Co.’s defined benefit plan is shown below:

❖ PV of defined benefit obligation, Jan. 1 ₱480,000
❖ PV of defined benefit obligation, Dec. 31 488,000
❖ Interest cost 10%
❖ Benefits paid to retirees 200,000
❖ Increase in present value of defined benefit obligation during the year due to changes in actuarial
assumptions 40,000
Compute for the current service cost.

4. PELLUCID CLEAR Co. agrees to provide lump-sum retirement benefits to employees equal to 6% of final salary for each year of
service. Information on employees is shown below:
❖ Average annual salary level on January 1, 20x1 ₱12,000,000
❖ Average annual salary increase starting January 1, 20x2 and every year thereafter.
3%
❖ Average service lives before entitlement to retirement benefits (January 1, 20x1 to December 31,
20x5) 5 years
❖ Discount rate per year 10%
a. How much is the current service cost in 20x2?
b. How much is the present value of the defined benefit obligation on December 31, 20x2?

5. Binge Co. agrees to provide lump-sum retirement benefits to employees equal to 8% of final salary for each year of service.
Information on its employees is shown below:
Average annual salary level on January 1, 20x1 ₱15,000,000
Average annual salary increases starting January 1, 20x2 and every year thereafter. 5%
Average service lives before entitlement to retirement benefits (January 1, 20x1 to December 31, 20x5) 5 years
Discount rate per year 10%

In relation to the above retirement benefits, Binge Co. has the following information during the year 20x2:
Fair Value of Plan Assets, Jan. 1 20x2 ₱ 800,000
Benefits Paid 0
Contributions to the fund, July 31, 20x2 1,020,000
Actuarial losses during the period 0
Discount rate on high quality corporate bonds, Jan 1, 20x2 10%
Discount rate on government bonds, Dec 31, 20x2 8%
Tax rate on gross returns of plan assets 10%
Costs of managing plan assets ₱ 35,000
Actual interest income from plan assets ₱ 80,000
Actual unrealized gains from changes in fair value of plan assets ₱ 50,000

Requirements:
a. Compute for the net defined liability/asset on Jan 1 20x2
b. Compute for the net defined liability/asset on Dec 31 20x2
c. Defined benefit cost for 20x2
d. Journal entry to record the defined benefit cost in 20x2
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SOLUTIONS TO QUIZ 2:
1. 3pts
Solution:

Remeasurements of the net defined benefit liability (asset):

(a) Actuarial (gain) loss 32,500
(b) Difference between interest income on plan assets
and return on plan assets (450,000 - 495,000) (45,000)
(c) Difference between the interest on the effect of the asset
ceiling and the change in the effect of the asset ceiling -
Defined benefit cost recognized in OCI 12,500

Fair value of plan assets

Jan. 1 5,035,000
Return on plan assets 495,000 390,000 Benefits paid
Contributions to the fund 425,000
5,565,000 Dec. 31

2. 5pts
Solution:

Service cost 800,000

Interest cost on the defined benefit obligation (10M x 10%) 1,000,000
Interest income on plan assets (10.4M x 10%) (1,040,000)
Actuarial (gains) and losses 20,000
Difference between interest income on plan assets and return
on plan assets 140,000
Defined benefit cost 920,000

Journal Entry:
Retirement Benefit Expense 760,000
Remeasurement of defined benefit liability 160,000
Net defined benefit liability 920,000

3. 2pts
Solution:
PV of defined benefit obligation
480,000 Jan. 1
Benefits paid 200,000 120,000 Current service cost (squeeze)
48,000 Interest cost (480,000 x 10%)
40,000 Actuarial loss - increase in PV of PBO
Dec. 31 488,000

4. 5pts
a. Solution:
Final salary level (12M x 103% x 103% x 103% x 103%) 13,506,106
Multiply by: Percentage of benefit per year 6%
Benefit per year of service 810,366
Multiply by: No. of service years 5
Lump sum retirement benefit 4,051,832

(13,506,106 x 6%) = 810,366 benefit entitlement per year;

(810,366 x PV of 1 @10%, n=3) = 608,840 current service cost in 20x2 *(n=3 is from December 31, 20x2 to December 31, 20x5)

b. Solution:
(13,506,106 x 6%) = 810,366 benefit entitlement per year;
(810,366 x 2 years passed x PV of 1 @10%, n=3) = 1,217,680
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5.
a. Compute for the net defined benefit liability/asset on Jan 1, 20x1

Average annual salary level on January 1, 20x1 15,000,000.00

Average annual salary increase starting January 1,
20x2 and every year thereafter. 5%
Average service lives before entitlement to
retirement benefits (January 1, 20x1 to December
31, 20x5) 5
Discount rate per year 10%

Final salary level 18,232,594

Multiply by 8%
benefit entitlement per year of service 1,458,608.00

Benefit PV of 1
entitlement per @10%, Current Service
Date year of service "n=4,3,2,1,0" Cost

Jan 1 20x1

Dec 31 20x1 1,458,608.00 ₱0.6830 996,229

Dec 31 20x2 1,458,608.00 ₱0.7513 1,095,852

Accumulated Retirement PV of 1 @10%,

Date PV of DBO
Benefits to Date "n=4,3,2,1,0"
Jan 1 20x1
Dec 31 20x1 1,458,608 0.6830 996,229
Dec 31 20x2 2,917,216 0.7513 2,191,704

FVPA, Jan 1 800,000

PV of DBO, Jan 1 996,229
Net defined benefit liability- Jan 1 - 196,229

b. Compute for the net defined liability/asset on Dec 31 20x2

Actual Interest Income 80,000

Actual unrealized gains from changes in fair value 50,000
Costs of managing plan assets 35,000
Taxes on gross returns 10%

Return on Plan Assets 82,000

FVPA Jan 1 800,000

Return on Plan Assets 82,000
Contributions to the fund, July 31, 20x2 1,020,000
FVPA, Dec 31 1,902,000

PV of DBO, Jan 1 20x2 996,229

Current Service Cost 1,095,852

Interest cost on the DBO 99,623
PV of DBO, Dec 31 2,191,704
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FVPA, Dec 31 1,902,000
PV of DBO, Dec 31 2,191,704
Net defined benefit liability- Dec 31 - 289,704

c. Defined benefit cost for 20x2

Current Service Cost 1,095,852.00

Net Interest on the net defined benefit
liability (asset) - 22,877.00
Defined benefit cost in P/L 1,072,975.00

Actuarial loss -
Difference between interest income and
return on plan assets 40,500.00
Defined benefit cost in OCI 40,500.00

Total defined benefit cost 1,113,475.00

d. Journal entry to record the defined benefit cost in 20x2

Retirement Benefits Expense 1,072,975.00

Remeasurement of defined benefit liability 40,500.00
Net defined benefit liability 1,113,475.00