CHAPTER 5

EMPLOYEE BENEFITS

Problems

5 – 1. (Red Hot Company)

(a) Liability for Compensated Absences, December 31, 2019

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 employee benefit expense for 2020 P21,150

(c) Liability for Compensated Absences 2,520

Employee Benefit Expense – Compensated Absences 10,280
Cash 12,800
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
Total amount paid for compensated absences 12,800

(d) Employee Benefit Expense – Compensated Absences 10,870

Liability for Compensated Absences 10,870

Liability for Compensated Absences, December 31, 2020

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 5–1 4 380 1,520
Total P10,870

5-2. (Green Grass Corporation)

(a) Total payment in 2020

35 x 12 x 450 P189,000
25 x 10 x 450 112,500 P301,500
Liability, beginning of 2020 (13-10) x 20 x 450) (27,000)
Liability, end of 2020 (12 – 10) x 40 x 450) 36,000
Sick leave expense in 2020 P310,500

(b) P36,000 (see above)

(c) Liability for Compensated Absences 27,000

Compensated Absences 27,000
Reversing entry

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 Chapter 5 – Employee Benefits

Compensated Absences 301,500

Cash 301,500
Payments during the year

Compensated Absences 36,000

Liability for Compensated Absences 36,000
Year-end accrual

5-3. (McKinley Company)

(a) Vacation earned for work in 2020 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 2020 P420,000

(b) Liability for accumulated vacations, 12/31/19 P500,000

Vacations taken during 2020 (300,000)
Vacation pay expense for 2020 420,000
Liability for accumulated vacations, 12/31/20 P620,000

5-4. (Blue Jeans Company)

(a) Retirement Benefit Expense (Required Contribution)

(P6M x 8%) + (P35M - P10M) x 5% = P1,730,000

(b1) Retirement Benefit Expense 1,730,000

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

(b2) Retirement Benefit Expense 1,730,000

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

5-5. (Yellow Ribbon Trading Company)

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, 2019

P3,000,000 – P2,600,000 P 400,000

(b) Retirement benefit expense in 2020 P 1,040,000

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 Chapter 5 – Employee Benefits

(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

(e1) Benefit Obligation P4,050,000

(e2) Plan Assets P3,450,000

(f) Net defined benefit liability/asset:

Beginning balance (liability) P 400,000
Underfunding (see entry d) 200,000
Ending balance (liability) P 600,000

Reconciled with the memorandum records:

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

5-6. (Midnight Black Company)

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 50,000 50,000
obligation
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, beginning

(1,350,000 – 1,250,000) P100,000
Underfunding 1,000
Defined benefit liability, end P101,000
or
Benefit obligation P3,701,500
Less plan assets 3,600,500
Defined benefit liability, end P 101,000

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 Chapter 5 – Employee Benefits

5-7. (Brown Cup Company)

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 (40,000) (40,000)*
Obligation
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) Defined benefit asset, January 1, 2020

P8,200,000 – P8,500,000 P300,000

(b) Actuarial gain or loss

(1) On plan assets (780,000 – 850,000) P70,000 loss
(2) On benefit obligation (squeezed, see above) P40,000 gain

(c) Defined Benefit Cost

In profit or loss P1,170,000
In other comprehensive income P 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

5-8. (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 4,400,000
Actual return on plan assets P 550,000

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 Chapter 5 – 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

5-9. (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, December 31, 2018

(9,000,000 – 8,000,000) P1,000,000
Underfunding (2,010,000 – 2,000,000) 10,000
Defined benefit liability, December 31, 2019 P1,010,000

(d) Benefit obligation, end P11,050,000

Plan assets, end 10,040,000
Defined benefit liability, end P 1,010,000

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 Chapter 5 – Employee Benefits

5-10. (Global Financing Company)

(a) Worksheet

Defined Benefit Cost Benefit Liability (Asset)

Other
Profit or Comprehensive Benefit
Loss Income Obligation Plan Assets
Beginning balances 5,300,000 5,500,000
Current service cost 1,000,000 1,000,000
Interest cost
10% x 5,300,000 530,000 530,000
10% x 5,500,000 (550,000) 550,000
Benefits paid (300,000) (300,000)
Contributions 1,000,000
Actuarial gain/loss
Benefit obligation 70,000 70,000*
Plan asset (50,000) 50,000*

Ending balances 1,900,000 110,000 6,600,000 6,800,000

*squeezed

Surplus, end (6,800,000 – 6,600,000) 200,000

Ceiling, end (given) 180,000
Excess of surplus over ceiling, end 20,000
Adjustment
in profit or loss (200,000 – 100,000) x 10% 10,000
in other comprehensive income 10,000

(b)
Retirement Benefit Expense 980,000
Re-measurement of Defined Benefit
Liability/Asset-OCI 20,000
Defined Benefit Liability/Asset 1,000,000

Defined Benefit Liability/Asset 1,000,000

Cash 1,000,000

Retirement Benefit Expense 10,000

Re-measurement of Defined Benefit
Liability/Asset – OCI 10,000
Defined Benefit Liability/Asset 20,000

(c)
Defined Benefit liability/Asset
Beg.balance 200,000 : Current service cost 1,000,000
Contributions 1,000,000 : Adjustment 20,000
1,200,000 : 1,020,000

(d)
Present value of reduction in future contributions
(1,200,000 – 1,020,000) P180,000

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 Chapter 5 – Employee Benefits

MULTIPLE CHOICE QUESTIONS

Theory

MC1 C MC6 D MC11 D MC16 A

MC2 A MC7 A MC12 D MC17 B
MC3 B MC8 A MC13 A MC18 D
MC4 A MC9 A MC14 C MC19 D
MC5 D MC10 A MC15 B MC20 B

Problems

MC21 B Current service cost P140,000

Interest cost on plan assets (9% x 3M) (270,000)
Interest cost on benefit obligation (9% x 3.2M) 288,000
Retirement benefit expense P158,000

MC22 D Actuarial loss on plan assets (270,000 – 185,000) P85,000

Actuarial loss on benefit obligation (given) 20,000
Defined benefit cost taken to OCI P105,000

MC23 C Defined benefit liability, beginning (3.2M – 3M) P200,000

Defined benefit cost (158,000 + 105,000) P263,000
Contributions to the fund 204,000
Underfunding 59,000
Defined benefit liability, ending P259,000

MC24 A Fair value of plan assets, beginning P2,500,000

Contributions to the fund 800,000
Benefits paid (340,000
Fair value of plan assets, ending before actual return P2,960,000
Fair value of plan assets, ending (given) (3,200,000)
Actual return on plan assets P 240,000

MC25 B Actuarial loss on plan assets (10% x 2.5M) – 240,000 P 10,000

MC26 B Retirement benefit liability, January 1, 2020 (5M – 3.8M) P1,200,000

MC27 A Full amount of past service cost is recognized as expense P580,000

MC28 A Actuarial gain or loss is taken to other comprehensive

income, not in profit or loss P-0-

MC29 B Current service cost P600,000

Past service cost 580,000
Net interest cost 12% x (5M – 3.8M) 144,000
Retirement benefit expense for the year P1,324,000

MC30 C Fair value of plan assets, January 1 P3,800,000

Actual return on plan assets 550,000
Contributions to the fund 750,000
Fair value of plan assets, December 31 P5,100,000

MC31 D Benefit obligation, January 1 P5,000,000

Interest cost (12% x 5M) 600,000
Current service cost 600,000
Past service cost 580,000
Actuarial gain on benefit obligation (70,000)
Benefit obligation, December 31 P6,710,000

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 Chapter 5 – Employee Benefits

MC32 B Retirement benefit cost taken to P/L P1,324,000

Actuarial gain on plan assets (550,000-456,000) (94,000)
Actuarial loss on benefit obligation (70,000) P1,160,000
Contributions to the fund 750,000
Underfunding P410,000

MC33 D Benefit obligation, end P6,710,000

Plan assets, end 5,100,000
Defined benefit liability, December 31, 2020 P1,610,000
or
Defined benefit liability, January 1 (5M-3.8M) P1,200,000
Underfunding 410,000
Defined benefit liability, December 31, 2020 P1,610,000

MC34 C Benefit obligation, January 1 P4,600,000

Interest cost (10% x 4.6M) 460,000
Benefits paid (390,000)
Actuarial gain on benefit obligation (32,500 + 8,500*) (41,000)
*Plan assets before actuarial loss
5,035,000 + 503,500 + 425,000
– 390,000 5,573,500
Plan assets, end 5,565,000
Actuarial loss on plan assets 8,500
Benefit obligation, December 31 before service cost P4,629,000
Benefit obligation, December 31, as reported 5,629,000
Service cost P1,000,000

MC35 A Expected return on plan assets (10% x 5,035,000) P503,500

Actuarial loss 8,500
Actual return on plan assets P495,000

MC36 A Current service cost P1,000,000

Net interest cost 10% x (5,035,000 – 4,600,000) (43,500)
Retirement benefit cost taken to P?L P956,500
Net actuarial gain (32,500)
Total retirement benefit expense for the year P924,000

MC37 A Current service cost is fully funded; so, the underfunding

arises from past service cost (600,000 – 240,000) P360,000

MC38 C Benefit obligation, January 1 P4,400,000

Interest cost (12% x 4.4M) 528,000
Current service cost 1,480,000
Actuarial gain on benefit obligation (200,000 – 150,000) (50,000)
Payments to retirees (600,000)
Benefit obligation, December 31 P5,758,000

MC39 D Past service cost P2,400,000

Current service cost 300,000
Contributions to the fund (2,500,000)
Liability relating to the retirement benefit cost P 200,000
&
MC40 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.

MC41 D Current service cost P2,000,000

Past service cost 1,300,000
Net interest cost 10% x (12M – 10M) 200,000
Retirement benefit cost taken to P&L P3,500,000

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 Chapter 5 – Employee Benefits

MC42 C Actual return on plan assets 1,500,000

Actuarial gain on plan assets 500,000
Expected return 1,000,000
Rate of return (1M/10M) = 10% 10%

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