EXAMPLE EXERCISE

POSTEMPLOYMENT BENEFITS

1. Defined contribution plan

An employee is a member of the faculty of accounting at a certain university. During the current
year, the employee earned P600,000. The employee is covered by the university’s DC plan which
requires the university to contribute the equivalent of 5% of the employee’s salary or P30,000
for the current year to a trustee. Assuming yearly contribution, the university shall recognize the
contribution.
a. Prepare journal entry to record the yearly contribution.

2. On January 31, 2021, an entity paid P100,000 contribution to a defined contribution plan in
exchange for services performed by the employees in December 2020.
a. Prepare journal entry to record (a) accrual of benefit on December 31, 2020 (b) the
payment of the contribution on January 31, 2021.

3. On December 31, 2020, an entity paid P200,000 contribution to a defined contribution plan. Of
this amount, P150,000 is in part exchange for services performed by the employees in
December 2020, and the balance of P50,000 is in respect of services to be performed in 2021.
a. Prepare journal entry to record the contribution on December 31, 2020.

4. Defined benefit plan (Projected unit credit method)

An employer pays lump sum to employee when they retire. The lump sum is equal to 5% of their
salary in the final year of service, for every year of service. The following data pertain to a
certain employee:
a. The employee is expected to work for 5 years (actuarial assumption).
b. The salary is expected to rise by 8% per annum (actuarial assumption).
c. The salary in 2020 is P200,000 per annum.
d. The discount rate is 10% per annum.

i. Compute for the final salary of the employee in 2024.

ii. Compute for the current service cost recognized each year.
iii. Compute for the projected benefit obligation at the end of each year.
iv. Compute for the total employee benefit expense to be reported each year.

5. Net Interest
At the beginning of the current year, the records showed the following:
Fair value of plan assets 4,000,000
Defined benefit obligation 5,000,000
Discount rate 12%
Expected return on plan assets 10%
Compute for the net interest expense.
6. Past service cost
An entity operates a defined benefit plan that provides for a benefit of 5% of final salary for
each year of service. The benefits become vested after 5 years of service.

On January 1, 2020, the entity improves the benefit to 6% of final salary for each year of service
including prior years. At the date of the amendment on January 1, 2020, the present value of
the additional benefits increased as follows:

Employees with more than 5 years of service on

January 1, 2020 300,000
Employees with less than 5 years of service on
January 1, 2020 and average period until vesting is
3 years. 150,000

7. Plan assets
An entity provided the following data for the current year related to a defined benefit plan:
Fair value of plan assets – beginning 5,000,000
Actual return on plan assets during the year 900,000
Contribution to the fund 1,000,000
Benefits paid 200,000
Discount rate 6%
Compute for the (i) remeasurement gain and (ii) Fair value of plan assets – ending.

8. Projected benefit obligation

An entity has established a defined benefit plan. The characteristics of the plan on January 1,
2020 are:
a. The defined annual benefit formula is 5% of the highest salary times the number of
years of service. The annual benefit is paid at the end of each year after retirement.
b. The age of retirement is 65.
c. The discount rate is 10%.
d. The life expectancy of the employee is 8 years beyond retirement

On January 1, 2020, an employee is 40 years of age and has worked for the entity for 5 years.
The current salary is P500,000 annually. Since the retirement age is 65, it means that the
employee has a remaining service period of 25 years.

Assume that the current salary of the employee of P500,000 will increase by 5% every year until
retirement.

i. How much will be the salary by the year 2044, the last year of employment, after 25 years
from January 1, 2020.

ii. Compute for the present value of benefit obligation – January 1, 2020.

9. Defined Benefit Plan

(Comprehensive illustration)
 At the beginning of current year, the memorandum records in relation to a defined benefit plan
showed the following:

Fair value of plan assets 5,000,000

Projected benefit obligation 7,000,000
Prepaid/accrued benefit cost (2,000,000)

During the current year, the following transactions are gathered:

Current service cost 1,200,000

Past service cost 300,000
Actual return on plan assets 800,000
Contribution to the plan 1,000,000
Benefits paid 500,000
Actuarial loss due to increase in PBO 900,000
Discount rate 10%

a. Compute for the employee benefit expense.

b. Compute for the net remeasurement loss
c. Compute for the accrued benefit cost during the year
d. Prepare journal entry to record the prepaid/accrued benefit cost – Dec 31.
e. Prepare reconciliation of FVPA – Dec 31.

10. Worksheet Approach. Prepare journal entry using he worksheet approach.

11. (Settlement of plan) At the beginning of current year, the memorandum records of a defined
benefit plan showed the following:

Fair value of plan assets 4,000,000

Projected benefit obligation 5,500,000
Prepaid/accrued benefit cost (1,500,000)

During the current year, the following transactions are gathered:

Current service cost 800,000

Actual return on plan assets 300,000
Contribution to the plan 600,000
Settlement price of defined benefit obligation 450,000
PV of DBO settled 500,000
Discount rate 5%

a. Compute for the settlement gain

b. Compute for the employee benefit expense.
c. Compute for the net remeasurement loss
d. Compute for the accrued benefit cost during the year
 e. Prepare journal entry to record the prepaid/accrued benefit cost – Dec 31.
f. Prepare reconciliation of FVPA – Dec 31.

12. (FVPA more than PBO) A defined benefit plan revealed the following information at the
beginning of current year:
Fair value of plan assets 4,500,000
Projected benefit obligation 4,000,000
Prepaid/accrued benefit cost – surplus 500,000
Asset ceiling 300,000
Effect of asset ceiling 200,000

The following data are provided for the current year:

Current service cost 900,000

Actual return on plan assets 1,000,000
Contribution to the plan 700,000
Benefits paid 200,000
Actuarial gain due to decrease in PBO 300,000
Asset ceiling on December 31 800,000
Discount rate 10%
a. Compute for the FVPA – Dec 31.
b. Compute for the PBO – Dec 31.
c. Compute for the effect of asset ceiling
d. Compute for the employee benefit expense
e. Compute for the remeasurement loss on asset ceiling

13. Short-term employee benefits

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.

On January 1, 2020, the accrued sick leave pay was measured at P20,000. On December 31,
2020, the sick leave records of employees A, B, and C are:

A B C
Daily wage 1,000 1,500 2,000
Unused sick leave on January 1, 2020 8 4 2
Sick leave earned in 2020 10 10 10
Sick leave taken in 2020 6 6 8
Wage increase effective January 1, 2020 5% 10% 15%

a. Compute for the unused sick leave – December 31, 2020.

b. Compute for the total accrued liability – December 31, 2020
c. Compute for the increase in accrued liability

14. Profit-sharing
 A profit sharing bonus plan requires an entity to pay 10% of 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 P50 million for the current year. The entity expects to save 5% of
the maximum possible bonus payment through staff turnover. The bonus will be paid at the end
of the following year.

a. Prepare journal entry to recognize the bonus in the current year.

b. Prepare journal entry to record the bonus payment at the end of the following year,
assuming there is no change in the estimated liability.

15. Termination benefits

An entity is committed to close a factory in 10 months and at that time, shall terminate the
employment of all the remaining employees of the factory.

The plan of termination is as follows:

a. An employee leaving before closure of the factory shall receive P10,000.
b. Each employee that renders service until the closure of the factory shall receive on the
termination date a cash payment of P30,000.
c. There are 120 employees at the factory.
d. The entity expects 20 employees to leave before closure and 100 employees to render
service until closure.

(i) Compute for the total cash outflow.

(ii) Compute for the liability for termination benefits.