Q1. The following information relates to Nazarali Inc. (Nazarali) and its defined-benefit pension plan for the year:
Contributions | $3.0 million |
Reported pension expense | $2.8 million |
Economic pension expense | $3.1 million |
Based on the information above, which of the following statements is most accurate?
A) There is a reduction in the overall pension obligation of $100,000.
B) There is a source of borrowing of $100,000.
C) There is a reduction in the overall pension obligation of $200,000.
Correct answer is B)
The economic pension expense represents the true cost of the pension. The reported pension expense is irrelevant in this case.
Since the economic pension expense ($3.1 million) exceeds the contributions ($3.0 million), the $100,000 difference can be viewed as a source of borrowing. Alternatively, if the firm’s contributions exceed the economic pension expense, the difference can be viewed as a reduction in the overall pension obligation, similar to an excess principal payment on a loan.
Q2. Consider a situation at a firm where the differences in its cash flow and economic pension expense are considered material to
the financial statements. The relevant tax rate is 30%. The expected return on plan assets is $120,000, interest cost is $85,000,
employer’s contribution is $215,000, service cost is $450,000, and the actual return on plan assets is $50,000. Based on the
information provided and for analytical purposes only, which of the following statements is most appropriate?
A) There is a reclassification of $270,000 from operating cash flow to financing cash flow.
B) There is a reclassification of $189,000 from operating cash flow to financing cash flow.
C) There is a reclassification of $140,000 from operating cash flow to financing cash flow.
Correct answer is B)
The economic pension expense = service cost + interest cost − actual return on plan assets = $450,000 + $85,000 − $50,000 = $485,000.
Since the differences in cash flow and economic pension expense are considered material, for analysis purposes we should consider reclassifying the difference from operating activities to financing activities in the cash flow statement.
The employer’s contribution was only $215,000. Since the economic pension expense exceeds the cash flow, the difference, net of tax, is treated as a borrowing in the cash flow statement for analytical purposes. Assuming a tax rate of 30%, $189,000 is reclassified from operating cash flow to financing cash flow [($485,000 economic pension expense − $215,000 employer contribution) ((1 − 30% tax rate)].
Q3. With regards to a firm’s post-retirement healthcare plan, which of the following statements about its cash flows is least
accurate?
A) Cash flows occur when the benefits are paid.
B) Cash flows are reported as operating activities.
C) Cash flows occur when the firm makes contributions to the plan.
Correct answer is C)
A post-retirement healthcare plan is an example of an unfunded plan. In a funded plan, the cash flows occur when the company makes contributions to the plan. In an unfunded plan, the cash flows occur when the benefits are paid. In either case, the cash flows are reported as operating activities in the cash flow statement.
发表于 2009-1-17 14:26
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