POST EMPLOYMENT BENEFITS
ILLUSTRATIVE EXAMPLE 1
ABC Company has a defined contribution plan that covers the existing employees. The term of
the plan required ABC to contribute 5% of the annual employee's salaries to the retirement plan
each year. The payroll record shows the annual salaries as follows:
2021
4,000,000
2022
4,200,000
Required:
Prepare journal entry to record the employee benefit expense for 2022 and 2022.
ILLUSTRATIVE EXAMPLE 2
On February 15, 2022, DEF Company paid P300,000 contribution to a defined contribution plan
in exchange for service performed by employees in 2021.
Required:
Prepare journal entries to record the accrual of the benefit on December 31 2021 and the
payment of the contribution on February 15, 2022.
ILLUSTRATIVE EXAMPLE 3 (IFRS)
On December 31, 2021, GHI Company paid P400.000 contribution to a defined contribution
plan. Of this amount, P350, 000 is in part exchange for services performed by employees for
2021, and the balance of P50, 000 is in respect of services to be performed in 2022.
Required:
Prepare journal entry to recognize the contribution on December 31, 2021.
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ILLUSTRATIVE EXAMPLE 4 (DEFINED CONTRIBUTION PLAN)
WPS Company retirement plan has the following details:
•
Annual contribution to a fund held by a trustee, P400,000.
•
Upon retirement, an employee shall receive retirement benefit based on whatever
amount is Projected on the fund.
•
Actual contributions to the fund are: P160,000 in 2022 and P900,000 in 2023. An
employee retired in 2024 and was paid a total of P30,000 retirement benefits
Required:
1. Prepare journal entries in 2022, 2023 and 2024
2. Assuming that WPS Company does not transfer funds to a trustee but rather sets
up a retirement fund to be managed internally, prepare journal entries in 2022,
2023 and 2024.
3. Assuming that WPS Company does not transfer retirement funds to a trustee and
does not set up a retirement fund specifically to be used in paying retirement
benefits, prepare journal entries in 2022, 2023 and 2024.
ILLUSTRATIVE EXAMPLE 5 (IAA)
MNO Company has established a defined pension plan for the employee's. Annual payments
under the pension plan are equals to 3% of an employee's highest Lifetime salary multiplied by
the number of years with the entity.
An employee's salary in 2021 was P300, 000. The employee is expected to retire in 10 years,
and the salary increase is expected to average 4% per year during that period.
On December 31, 2021, the employee has worked for 12 years. The future value of 1 at 4% for
10 periods is 1.48.
Required:
1. What is the amount of annual pension payment to be used in computing the
employee's projected benefit obligation on December 31, 2021?
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ILLUSTRATIVE EXAMPLE 6 (IAA)
PQR Company has established a defined benefit pension plan for the employee's annual
payment under the pension plan are equal to an employee's highest lifetime salary multiplied by
2% multiplied by the number of years with entity. As of the end of 2021, an employee had
worked for PQR Company for 10 years. The current salary of employee is P500,000. The
employee expected to retire in 25 years and the salary increase is expected average 3% per
year during the period. The employee is expected to live for 15 years after retiring and will
receive the annual pension payment one year after retirement. The discount rate is 8%. The
relevant present value and future value factors are:
Future value of 1 at 3% for 25 periods
2.094
PV of an ordinary annuity of at 1 at 8% for 15 periods.
8.559
PV at 1 at 8% for 25 periods.
0.146
Required:
1. What is the projected benefit obligation on December 31, 2021?
ILLUSTRATIVE EXAMPLE 7 (IAA)
STU Company has established a defined benefit plan for the employees. Annual payments
under the plan are equal to highest lifetime salary multiplied by 2% multiplied by the number of
years with the entity. On December 31, 2021, an employee had worked with the entity for 15
years. The current annual salary of the employee is P600, 000. The employee is expected to
retire in 10 years and the increase in salary is expected to be 4% per year. The employee is
expected to live 8 years after retirement and shall receive the first annual pension payment one
year after retirement. The discount rate is 10%. Thee relevant present value and future value
factors are:
Future value of 1 at 4% for 10 periods.
1.480
PV of an ordinary annuity of 1 at 10% for 8 periods.
5.335
PV of at 10% for 10 periods.
0.386
Required:
Determine the projected benefit obligation on December 31, 2021
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ILLUSTRATIVE EXAMPLE 8 (IFRS)
A Xdirector of VWX Company receives retirement benefit of 10% of the final salary per annum
for a contractual period of three years. The director does not contribute to the scheme.
The anticipated salary of the direction on over three years is P1,000,000 for 2021, P1,200,000
for 2022 and P1,440,000 for 2023.
The discount rate 5%. The present value of 1 at 5% for:
One period
.9524
Two periods
.9070
Three periods
.8638
Required:
1. Determine the current service cost for 2021, 2022 and 2023.
2. Prepare a schedule showing the pension liability on December 31 each of year and
the interest expense for 2021 and 2023.
ILLUSTRATIVE EXAMPLE 9
On January 1, 2021, YZA Company agrees to pay a lump sum pension to the employees equal
to 5% of their final salary to times the number of worked after January 1, 2021.
It is estimated that the salary of a certain employee for 2029, the last year with the entity,
P1, 500,000.
The appropriate interest rate is 12%. The mathematical table shows the present value of 1 at
12% as follows:
Period
7
8
9
10
Present value of 1
.452
.404
.361
.322
Required:
Determine the current service and interest components of the employee benefit expense
related to the employee for 2021, 2022, and 2023. Use the projected unit credit method.
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ILLUSTRATIVE EXAMPLE 10
AAA has established a defined benefit plan. The plan has the following instruction on
January 1, 2021:
a. The defined annual benefit formula is 5% of the highest salary times the number years of
service. Payment of benefit is at the end of the year after retirement.
b. Retirement age is 65
c. Discount rate is 10%
d. 8 years would be the expected life period after the retirement.
On January 1, 2021 Gardo, 40 years of age has worked for 5 years. His current salary is
P500,000 annually. 5% is the estimated annual salary increase.
REQUIRE:
1. ANNUAL BENEFIT
2. PV OF PBO FOR THE NEXT 5 YEARS.
CONSIDER THE PV FACTORS
PERIOD
PV FACTOR
20……………..0.1486
21……………..0.1351
22……………..0.1228
23……………..0.1117
24……………..0.1015
ILLUSTRATIVE EXAMPLE 11 (IAA)
On January 1, 2021, BCD Company had the following balance in the memorandum records with
respect to a defined benefit plan:
Fair value of plan assets
Projected benefit obligation
5,000,000
6,000,000
During the year, the accountant had determined the current service cost is P1,550,000.
The discount rate is recognized at 10% and the expected return on plan asset is 12%. The
actual return in plan assets or the years is P650,000. The entity contributed P1, 200,000 on the
plan at the end of the year.
Required:
1. Determine the employee benefit expense (P/L) for the current year.
2. Determine the "remeasurement" on December 31, 2021.
3. Prepare the journal entry to record the employee benefit expense.
4. Reconcile the balance of the prepaid/accrued benefit cost with memorandum records.
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ILLUSTRATIVE EXAMPLE 12
On January 1, 2021, EFG Company had the following balances in the memorandum records
related, to a defined benefit plan
Fair value of asset
Projected benefit obligation.
5,750,000
6,500,000
The actuary provide the following information for year ended December 31, 2021:
Current service cost
Settlement discount rate
Expected return on plan assets
Actual return on plan assets
Contribute on plan
Benefit paid to retirees
600,000
10%
8%
700,000
900,000
100,000
Required:
1. Determine the employee benefit expense for the current year.
2. Determine the remeasurement" on December 31, 2021.
3. Prepare the journal entry to record the employee benefit expense.
4. Determine the balance of the prepaid /accrued benefit cost in December 31, 2021.
5. Reconcile the prepaid/accrued benefit cost with the memorandum records.
ILLUSTRATIVE EXAMPLE 13 (IAA)
On January 1, 2021, HIJ Company provide the following data in connection with a benefit plan:
Fair value of plan assets
Projected benefit obligation
6,700,000
7,600,000
The account revealed the following information for the current year.
Current service cost
Past service cost
Discount rate
Actual return on plan assets
Contribution on the plan
Benefit plan to retirees
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1,450,000
300,000
10%
500,000
1,500,000
800,000
Required:
1. Determine the employee benefit expense fi the current year.
2. Determine the "remeasurements" on December 31, 2021 to be recognized as
component of other comprehensive income.
3. Prepare journal entry to record the employee benefit expense.
4. Compute the balance the prepaid/accrued benefit cost in December 31, 2021.
5. Reconcile the general ledger of the entity with the memorandum ledger
ILLUSTRATIVE EXAMPLE 14 (IAA)
On January 1, 2021, the memorandum records of KLM Company showed the following
balances related to a defined benefit plan prior to the adoption of PAS 19R:
Fair value of plan assets
6,000,000
Unamortized past service cost
300,000
Projected benefit obligation
(7,500,000)
Prepaid/accrued benefit cost
(1,200,000)
The remaining averages vesting period for the employee covers by the past device cost in 3
years. The transactions affecting the defined benefit plan for the current year are as follows:
Current service cost
Interest expense -8%
Actual return on plan
Contribution to the plan
Benefits paid to retiree's
900,000
600,000
700,000
500,000
150,000
Effective January 1, 2021, the entity is adopting the provision of PAS 19R in relation is defined
benefit plan.
Required:
1. Prepare the adjustment to recognize the transitional effect of PAS 19R.
2. Determine the employee benefit expense for the current year.
3. Prepare journal entry to record the employee benefit expense for the current year.
4. Compute the prepaid/accrued benefit cost on December 31, 2021.
5. Reconcile the general ledger of the entity with the memorandum records.
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ILLUSTRATIVE EXAMPLE 15 (IAA)
On January 1, 2021, NOP Company reported the following information in relation to a defined
benefit plan:
Fair value of plan asset's
Projected benefit
Prepaid/accrued benefit cost
6,500,000
(7,500,000)
(1,000,000)
During the current year, the entity determined that the year, the entity determined that current
service cost was P 1,200,000 and the discount rate is 10%. The actual return on plan assets
was P800,000 during the year.
Other related information during the year is as follows:
Contribution to the plan
Benefit paid to retirees
Decrease in projected benefit obligation due
to changes in actuarial assumptions
1,200,000
1,500,000
200,000
Required:
1. Determine the employee benefit expense for the current year.
2. Compute the "Remeasurements" related to the defined benefit plan.
3. Prepare journal entry to record the employee benefit expense.
4. Compute the prepaid/accrued benefit cost on December 31, 2021.
5. Reconcile the general ledger account with the memorandum record.
ILLUSTRATIVE EXAMPLE 16 (IAA)
On January 1, 2021, QRS Company provides the following in relation to a defined benefit plan:
Fair value of plan assets
6,000,000
Projected benefit obligation
5,000,000
Prepaid/accrued benefit cost- surplus
1,000,000
Asset ceiling
700,000
Effect of asset ceiling
300,000
During the current year, the following data are gathered:
Current service cost
Actual return on plan assets
Contribution to the plan
Past service
Decrease in projected benefit obligation due
Change in actuarial assumptions
Asset ceiling on December 31, 2021
Discount rate
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700,000
900,000
1,000,000
200,000
500,000
1,200,000
10%
Required:
1. Determine the fair value of plan assets on December 31, 2021.
2. Determine the projected benefit obligation on December 31, 2021.
3. Determine the effect of asset ceiling on December 31, 2021.
4. Compute the employee benefit expense for the current year.
5. Compute the "remeasurement" on December 31, 2021.
6. Prepare journal entry to record the employee benefit expense.
7. Reconcile the prepaid/accrued benefit cost account.
SHORT TERM EMPLOYEE BENEFITS
PROBLEM A
Employees are each entitled to two weeks of paid vacation leave. During the current year, the
employees earned 1,500 weeks’ vacation leave and used 1,000 weeks. The current salary of
the employees is an average of P3,000 per week and the salary is expected to increase by
P300 per week or a future weekly salary of P3,300.
Required:
1. Prepare journal entries for the current year assuming benefit is accumulating and
vesting.
2. Prepare journal entries assuming the benefit is non accumulating and nonvesting.
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PROBLEM B
Employees are each entitled to 10 working days of paid sick leave for each year. Unused sick
leave may be carried forward for one calendar year only.
Sick leave is taken out of any balance brought forward from the previous year and then out of
the current year's entitlement on a FIFO basis.
During 2022, the sick leave Records of key employees SY, Pee and AYE are as follows:
Daily wage
Unused sick leave as of January 1, 2022
Sick leave earned in 2022
Sick leave taken in 2022
Wage increase effective January 1, 2022
SY
Pee
AYE
1,500
10
10
7
20%
2,500
6
10
9
25%
4,000
4
10
6
30%
Required:
Compute the accrued liability for sick leave on December 31, 2022 for the three key
employees.
PROBLEM C
On January 1, 2022, Maricar Company agreed to grant the employees ten vested vacation days
each year, with the provision that vacation days earned in particular year could not be taken
until the following year. For the year ended December 31, 2022, all 50 employees earned P400
per day each and earned ten vacation days each. These vacation days were taken during the
last half of 2022.
In the 2022, income statement, what total expense should be reported for compensated
absences?
a. 200,000
b. 100,000
c. 50,000
d. 0
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PROBLEM D
Xeira Company reported that employees earned vacation days during the first year of
operations as follows:
Employee
1
2
3
average wage
per day
400
600
800
vacation days
vacation days
earned this year taken this year
10
10
15
10
20
5
What amount should be reported as accrued vacation pay at year end?
a. 29,000
b.14, 000
c.15, 000
d. 0
PROBLEM E
Giving Company granted all employees 2 weeks of paid vacation for each full year of
employment. Unused vacation time can be accumulated and carried forward to succeeding year
and will be paid at the salaries in effect when vacation is taken or when employment is
terminated. There was no employee turnover in 2022. The entity provided the following
additional information relating to the current year:
Liability for accumulated vacations on January 1, 2022…………………….350,000
Pre-2022 accrued vacations taken from:
January 1, 2022 to September 30, 2022
(The authorized period for vacation)…………………………………200,000
Vacation earned for work in 2022
(adjusted to current rates)…………………….………………………300,000
The entity granted a 10% salary increase to all employees on October 1, 2022, the annual
salary increase date. What amount should be reported as vacation pay expense for the
current year?
a.450, 000
b. 335, 000
c. 315, 000
d. 300, 000
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PROBLEM F
At the beginning of current year, an entity announced the decision to close the factory location in
Mindanao and terminate all 200 employees as a result of economic downturn. The entity shall
pay P20,000 per employee upon termination.
However, to ensure that the windup of the factory occurs smoothly and all remaining customer
orders are completed, the entity needs to retain at least 20% of employees until closure of the
factory in eight months.
As a result, the entity announced that employees who agree to stay until the closing of the
factory shall receive P60,000 payment at the end of eight months in addition to receiving their
current wage throughout the period of closure instead of the P20,000. Based on this offer, the
entity expected to retain 50 employees until the factory is closed.
What is the amount of termination benefit?
a. 6,000,000
b. 2,000,000
c. 4,000,000
d. 3,000,000
Solution 18-10 Answer c
As termination benefit
The termination benefit is the amount that the entity would have to pay for termination
employment without future service.
Termination benefit
Multiply by the total number of employee
Liability for termination benefit
20,000
200
4,000,000
As short-term employee benefit
The incremental benefit that employees shall receive if they render service for the full
eight-month period are recognized as short-term employee benefit.
Total payment for 8-month period
Termination benefit
Short-term employee benefit
60,000
(___20,000)
40,000
Multiply by employees leaving until closure
______50
Short-term employee benefit
2,000,000
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PROBLEM G (AICPAAdapted)
On September 1, 2022,Howe Company offered special termination benefits to employees who
had reached the early retirement age specified in the entity’s pension plan. The termination
benefits consisted of lump sum and periodic future payment. Additionally, the employees
accepting the entity offer receive the usual early retirement pension benefits. The offer expired
on November 30, 2022. Actual or reasonably estimated amounts on December 31, 2022
relating to the employees accepting the offer are as follows;
Lump sum payment made on January 1, 2023
475,000
Present value of periodic payments of P60,000 annually
for 3 years which will begin January 1, 2023
155,000
Reduction of accrued pension cost on December 31,
2022 for the termination employees
45,000
On December 31, 2022, what amount should be reported as total liability for termination
benefits?
a. 475,000
b. 585,000
c. 630,000
d. 655,000
Solution 18-11 Answer c
Lump sum payment
475,000
Present value of periodic payments
Total liability
155,000
630,000
An expense and liability must be recognized when special termination benefits are offered to
employees.
However, the expense is reduced by the reduction of accrued pension cost for the terminating
employees.
Journal entry
Termination benefits
Accrued pension cost
Liability for termination benefits
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585,000
45,000
630,000
PROBLEM H (AICPAAdapted)
Klaud Company has a profit sharing bonus plan which requires the entity to pay 12% of the
Income for the year to employees who serve throughout the current year and who will continue
to serve throughout the following year. The entity reported income of P80,000,000 for 2022.
The entity expects to save 5% of the maximum possible bonus payment through staff turnover.
The
bonus will be paid on December 31, 2023.
What is the bonus expense for 2022? 9,120,000
COMPREHENSIVE PROBLEM- DEFINED BENEFIT PLAN
The following balances were obtained from the records of GERBY CORP for its defined benefit
plan:
Defined Benefit Obligation, January 1, 2021
Fair Value of Plan Assets, January 1, 2021
Actual Return on Plan Assets
Settlement Price of additional DBO paid
Present Value of Additional DBO paid
Defined Benefit Obligation, January 1, 2022
Current Service Cost
Discount Rate
Benefits Paid to Retirees
Contribution to the Plan
Past Service Cost
Asset Ceiling, January 1, 2021
Asset Ceiling, January 1, 2022
2,400,000.00
3,200,000.00
340,000.00
600,000.00
580,000.00
1,760,000.00
1,000,000.00
10%
1,600,000.00
1,400,000.00
400,000.00
200,000.00
280,000.00
How much is the Defined Benefit Cost to be reported to Profit or loss?
How much is the Defined Benefit Cost to be reported to OCI?
How much is the Fair Value of Plan Assets as of 12/31/2021?
How much is the Overfunding or Underfunding for the year 2021?
How much is the net defined benefit asset/ liability that would be presented in the
Statement of Financial position?
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COMPREHENSIVE PROBLEM- DEFINED BENEFIT PLAN
The following information is made available in relation to the defined benefit plan of
NARUTO Company for the year 2025:
Current service cost
P200,000
Fair value of plan asset – December 31, 2025
4,000,000
Asset ceiling – January 1, 2025
200,000
Fair value of plan asset – January 1, 2025
2,000,000
Contribution to the plan
700,000
Discount rate
12%
Defined benefit obligation – December 31, 2025
3,440,000
Asset ceiling – December 31, 2025
340,000
Benefits paid to retirees
400,000
Defined benefit obligation – January 1, 2025
1,700,000
7. What amount of defined benefit cost should be reported in profit or loss?
A.
P164,000
B.
P560,000
C.P176,000
D.
P384,000
8. What is the remeasurement loss related to the change in the effect of asset ceiling?
P112,000
B.
P220,000
C.
P108,000
D. 0
9. What is the total net remeasurement gain/loss to be reported as a component of other
comprehensive income?
A.
P176,000
B.
P384,000
C.
P276,000
D.
P560,000
10. How much is the actual return on plan assets for the year 2025?
A.
P240,000
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B.
P1,460,000
C.
P1,220,000
D.
P1,700,000
11.
How much is the overfunding/underfunding for the year 2025?
A.
P140,000 over
B. P140,000 under
C. P248,000 over
D. P248,000 over
12.
How much is the balance of prepaid pension (asset) or accrued pension (liability)
that should be presented in the statement of financial position as of December 31, 2025?
A.
P340,000
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B.
P220,000
C.
P300,000
D.
P560,000