CHAPTER 6

EMPLOYEE BENEFITS
PROBLEMS
6 1. (Red Hot Company)
(a)
Beginning liability for compensated absences
6
x
420
=
P2,520
(b)

Employee Benefit Expense for Sick Leave and Vacation Leave

Sick Leave

Vacation Leave

5 x P450
10 x 420
2 x 400
2 x 380
12 x P450
12 x 420
2 x 400
5 x 380

P2,250
4,200
800
760
P5,400
5,040
800
1,900

Total

13,140
P21,150

(c)

Liability for Compensated Absences

2,520
Employee Benefit Expense Compensated Absences
10,280
Cash
12,800
Total amount paid for compensated absences
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
12,800

(d)

Employee Benefit Expense Compensated Absences

Liability for Compensated Absences
Liability for Compensated Absences, 12/31/12
Employee
Unused Vacation Days
A. B. Santos
12-7
5
C. D. Garcia
12+6 -3
15
E. F. Cruz
2
2
G. H. Buen
51
4
Total

6-2.

P8,010

10,870
10,870
Rate
P450
420
400
380

Amount
P2,250
6,300
800
1,520
P10,870

(Green Grass Company)

(a)

Total payment in 2012

35 x 12 x 450
P189,000
25 x 10 x 45
112,500 P301,500
Liability, beginning of 2012 (13-10) x 20 x 450)
(27,000)
Liability, end of 2012 (12 10) x 40 x 450)
36,000
Sick leave expense in 2012
P310,500

(b)

P36,000 (see above)

Chapter 6 Employee Benefits

(c)

Liability for Compensated Absences

Compensated Absences

27,000
27,000

Compensated Absences
Cash

301,500
301,500

Compensated Absences
Liability for Compensated Absences
6-3.

36,000

(Blue Jeans Company)

(a)
Retirement Benefit Expense = Required Contribution
= (P6,000,000 x 8%) + (35,000,000 - P10,000,000)5%
(b)

1.

2.

6-4.

36,000

Retirement Benefit Expense

Prepaid Retirement Benefit Cost
Cash

=P1,730,000

1,730,000
70,000
1,800,000

Retirement Benefit Expense

1,730,000
Cash
Accrued Retirement Benefit Cost

1,500,000
230,000

(Yellow Ribbon Trading)

Defined Benefit Cost

Profit or
Loss
Beginning balances
Current service cost
Interest cost
10% x 3,000,000
10% x 2,600,000
Actuarial gain or loss
Benefit obligation
Plan assets
300,000 -260,000
Benefits paid
Contributions
Ending balances
(a)
(b)
(c)
(d)

(e)

Other
Comprehensive
Income

P1,000,000
300,000
(260,000)

Benefit Liability (Asset)

Benefit
Obligation
P3,000,000
1,000,000

P2,600,000

300,000
260,000
100,000

100,000

(40,000)
(350,000)
1,040,000

Plan Assets

60,000

4,050,000

40,000
(350,000)
900,000
3,450,000

Net Prepaid/Accrued Benefit Cost, December 31, 2012

P3,000,000 P2,600,000 =
P 400,000
Retirement benefit expense in 2013
P1,040,000
Defined benefit cost taken to OCI
P
60,000
Retirement Benefit Expense
1,040,000
Remeasurement of Defined Benefit Asset/
Liabiility OCI
60,000
Cash
900,000
Defined Benefit Liability/Asset
200,000
Benefit Obligation
P4,050,000
Plan Assets
3,450,000

68

Chapter 6 Employee Benefits

(f)

6-5.

Net defined benefit liability/asset:

Beginning balance
Underfunding (see entry d)
Ending balance

P400,000 liability
200,000
P600,000 liability

Reconciled with the memorandum records:

Defined benefit obligation
Plan assets
Net liability

P4,050,000
3,450,000
P 600,000

(Midnight Black)
Defined Benefit Cost

Profit or
Loss
Balances, beginning
Service cost
Interest cost
9% x 1,350,000
9% x 1,250,000
Actuarial loss
On ben obligation
On plan assets
Past service cost
Benefits paid
Contributions
Balances, end
(a)

(b)

Other
Comprehensive
Income

2,000,000
121,500
(112,500)

Benefit
Obligation
1,350,000
2,000,000

1,250,000

112,500

300,000

50,000
(2,000)
300,000
(120,000)

52,000

Retirement Benefit Expense

Remeasurement of Defined Benefit
Liability/Asset
Cash
Defined Benefit Liability/Asset

3,701,500

Or P3,701,500 P3,600,500 =

(120,000)
2,360,000
3,600,500

2,309,000
52,000

Defined benefit liability , end

Beginning balance
(1,350,000 1,250,000)
Underfunding
Defined benefit liability, end

69

Plan Assets

121,500

50,000
2,000

2,309,000

Benefit Liability (Asset)

2,360,000
1,000
P100,000
1,000
P101,000
P101,000

Chapter 6 Employee Benefits

6-6.

Brown Cup
Defined Benefit Cost
Other
Comprehensive
Income

Profit or
Loss
Beginning balances
Current service cost
Interest cost
10% x 8,200,000
10% x 8,500,000
Actuarial gain or loss
On Ben. Obligation
On Plan Assets
780,000-850,000
Contribution
Ending balances
*Squeezed
(a)
(b)
(c)

(d)

(e)

(f)

6-7.

Benefit Liability (Asset)

1,200,000
820,000
(850,000)

Benefit
Obligation
8,200,000
1,200,000

Plan Assets
8,500,000

820,000
850,000
(40,000)

(40,000)*

70,000
1,170,000

30,000

10,180,000

(70,000)
1,500,000
10,780,000

P8,200,000 P8,500,000 =
P300,000 asset
Actuarial gain or loss
On plan assets
780,000 850,000 =
70,000 loss
On benefit obligation (squeezed, see above) =
40,000 gain
Defined Benefit Cost
In profit or loss
1,170,000
In other comprehensive income
30,000
Retirement Benefit Expense
Remeasurement of Defined Benefit
Asset/Liability OCI
Defined Benefit Liability/Asset

1,170,000

Defined Benefit Liability/Asset

Cash

1,500,000

30,000
1,200,000
1,500,000

Defined Benefit Asset:

Beginning balance
Overfunding (1,500,000 1,200,000)
Ending balance asset
Remeasurement of Defined Benefit
Asset/Liability OCI
Defined Benefit Asset/Liability

(White Flower Company)

(a)
Fair value of plan asset, ending
Fair value of plan assets, beginning
Contributions to the plan
Benefits paid
Balance, before actual return
Actual return on plan assets

70

P300,000
300,000
P600,000
50,000
50,000

P4,950,000
P4,600,000
500,000
(700,000)
P4,400,000
P 550,000

Chapter 6 Employee Benefits

(b)

6-8.

Actual return
Expected return based on interest rate of 10%
10% x P4,600,000
Actuarial gain taken to OCI

P
P

550,000
460,000
90,000

(Orange Gem Company)

(a)
Worksheet
Defined Benefit Cost
Other
Comprehensive
Income

Profit or
Loss
Beginning balances
Current service cost
Interest cost
10% x 9,000,000
10% x 8,000,000
Actuarial gain/loss
Benefit obligation
Plan assets
640,000-800,000
Benefits paid
Contributions
Past service cost
Ending balances
*squeezed
(b)

(c)

(d)

Benefit Liability (Asset)

1,000,000
900,000
(800,000)

Benefit
Obligation
9,000,000
1,000,000

800,000
(50,000)*

160,000
(600,000)

110,000

800,000
11,050,000

Retirement Benefit Expense

Remeasurement of Defined Benefit
Liability/Asset OCI
Defined Benefit Liability/Asset

1,900,000

Defined Benefit Liability/Asset

Cash

2,000,000

Or 11,050,000 10,040,000 =

(160,000)
(600,000)
2,000,000
10,040,000

110,000
2,010,000

Defined Benefit Liability/Asset, Dec. 31, 2013

Beginning balance (9,000,000 8,000,000)
Underfunding (2,010,000 2,000,000)
Defined benefit liability, Dec. 31, 2013

71

8,000,000

900,000

(50,000)*

800,000
1,900,000

Plan Assets

2,000,000
P1,000,000
10,000
P1,010,000
P1,010,000

Chapter 6 Employee Benefits

MULTIPLE CHOICE QUESTIONS

Theory
MC1
MC2
MC3
MC4
MC5

C
B
A
D
A

MC6
MC7
MC8
MC9
MC10
MC11
MC12
MC13
MC14
MC15
MC16

A
A
A
D
D
A
NO NO. 12
C
B
A
B

Problems
MC17
MC18
MC19

B
D
C

MC20
MC21
MC22
MC23
MC24

A
C
B
A
A

MC25
MC26
MC27

B
C
D

MC28

MC29

MC30

MC31
MC32
MC33

A
A
A

MC34

MC35
MC36

D
C

140,000 + 9%(3,200,000) 9%(3,000,000) = 158,000

185,000 270,000 = 85,000; 85,000 + 20,000 = 105,000 loss
158,000 +105,000 = 263,000 total retirement benefit cost
263,000 204,000 = 59,000 underfunding; 200,000 beg. Liability +
50,000 = 259,000
3,200,000 (2,500,000 +800,000 340,000) = 240,000
240,000 (10% x 3,200,000) = 80,000 loss
5,000,000 3,800,000 = 1,200,000 liability
Full amount of past service cost is recognized as expense
Actuarial gain or loss is taken to other comprehensive income, not in
profit or loss
600,000 + 580,000 + 12%(5,000,000 3,800,000) = 1,324,000
3,800,000 + 550,000 + 750,000 = 5,100,000
ABO= 5,000,000 + 600,000 + 580,000 + 12% (5,000,000) 70,000 =
6,710,000
Total retirement benefit cost = 1,324,000 70,000 (550,000-456,000)
= 1,160,000; 1,160,000 750,000 = 410,000 underfunding
ABO= 6,710,000; PA = 5,100,000; net liability = 6,710,000 5,100,000
=1,610,000
Actuarial loss on plan assets = 5,565,000 (5,035,000+503,500 +
425,000 390,000) = 8,500
Actuarial gain on benefit obligation = 32,500 + 8,500 = 41,000
Service cost = 5,629,000 (4,600,000 + 460,000 - 41,000 390,000)
=1,000,000 (or prepare worksheet and squeeze)
503,500 8,500 = 495,000
1,000,000 + 460,000 503,500 32,500 = 924,000
600,000 240,000 = 360,000 (Current service cost is fully funded, so
the underfunding arises from past service cost.)
4,400,000 + 12%(4,400,000) + 1,480,000 50,000 - 600,000 =
5,758,000
2,400,000 + 300,000 2,500,000 = 200,000 liability
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.

72