CPA Financial Accounting and Reporting Far Quiz: Account For Pension And Postretirement Benefits

What this quiz covers

This quiz focuses on Account For Pension And Postretirement Benefits, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Recognize $600,000 as pension expense in 20X5 because prior service cost is expensed immediately upon amendment.
2. Recognize $60,000 of pension expense in 20X5 and record$600,000 in other comprehensive income at the amendment date. (correct answer)
3. Recognize $60,000 of pension expense in 20X5 and record the unamortized$540,000 as a reduction of plan assets.
4. Defer recognition until the benefits are paid because the amendment does not affect the projected benefit obligation until settlement.

Explanation: FASB ASC 715 requires prior service cost from plan amendments to be initially recognized in other comprehensive income and then amortized to pension expense over the average remaining service period of active employees expected to receive benefits. The $600,000 prior service cost is recorded in OCI at the amendment date, and$60,000 ($600,000 ÷ 10 years) is amortized to pension expense in 20X5. Answer A incorrectly requires immediate expensing, which violates the matching principle underlying deferred recognition. Answer C incorrectly suggests reducing plan assets, when prior service cost affects only the PBO and equity accounts. Answer D incorrectly defers all recognition, when ASC 715 requires immediate OCI recognition with systematic amortization. The professional framework recognizes that plan amendments create an obligation for past service that should be matched with future periods when employees provide the remaining service that vests their enhanced benefits.

Question 2

1. Recognize a pension asset of $4.5 million.
2. Recognize a pension liability of $4.5 million. (correct answer)
3. Recognize a pension liability of $1.5 million.
4. No adjustment is needed because only contributions affect the funded status recognized.

Explanation: FASB ASC 715 requires entities to recognize the funded status of defined benefit pension plans on the statement of financial position, calculated as the difference between the projected benefit obligation (PBO) and fair value of plan assets. At December 31, 20X5, the funded status is: PBO $52.0 million - plan assets$47.5 million = underfunded by $4.5 million, requiring recognition of a pension liability. The prior year's funded status ($49.0 - $46.0 =$3.0 million underfunded) is already reflected in the opening balance sheet, so the focus is on properly stating the current year position. Answer A is incorrect because an underfunded plan creates a liability, not an asset. Answer C incorrectly calculates only the change in funded status rather than the total underfunded amount. Answer D is incorrect because ASC 715 explicitly requires balance sheet recognition of the full funded status. Professional judgment requires comparing PBO to plan assets at each reporting date and recognizing the net position as either an asset (overfunded) or liability (underfunded).

Question 3

1. Recognize a curtailment loss of $1,100,000 in pension expense and leave prior service cost in AOCI.
2. Recognize a curtailment gain of $1,100,000 in other comprehensive income and amortize it over the remaining service period.
3. Recognize a curtailment gain of $1,100,000 in earnings and accelerate recognition of the related$700,000 unrecognized prior service cost in earnings. (correct answer)
4. No recognition is required until employees are paid severance because curtailments are accounted for as settlements.

Explanation: FASB ASC 715 requires immediate recognition of curtailment gains or losses when a significant reduction in future service occurs, along with acceleration of any unrecognized prior service cost attributable to years of service no longer expected to be rendered. The $1,100,000 reduction in PBO creates a curtailment gain recognized in earnings, and the$700,000 unrecognized prior service cost related to eliminated future service must be accelerated from AOCI to earnings as well. Answer A incorrectly characterizes the PBO reduction as a loss and fails to address prior service cost acceleration. Answer B incorrectly defers the gain recognition to OCI when curtailments require immediate earnings impact. Answer D incorrectly equates curtailments with settlements, which are distinct events under ASC 715. The professional framework recognizes that curtailments fundamentally change the economics of the plan, requiring immediate recognition of both the direct gain/loss and any stranded deferred items that can no longer be matched with future service.

Question 4

1. $7,700,000
2. $4,000,000 (correct answer)
3. $1,500,000
4. $0, because unrecognized items in AOCI offset the underfunded status.

Explanation: FASB ASC 715 requires the statement of financial position to reflect the funded status of defined benefit plans, calculated as fair value of plan assets minus the projected benefit obligation (PBO), regardless of unrecognized items in AOCI. The net pension liability is: PBO $34,000,000 - plan assets$30,000,000 = $4,000,000 underfunded. The unrecognized prior service cost ($1,200,000) and actuarial loss ($2,500,000) remain in AOCI and do not affect the balance sheet liability amount. Answer A incorrectly adds the AOCI items to the funded status. Answer C incorrectly uses only part of the underfunded amount. Answer D incorrectly suggests AOCI items offset the balance sheet presentation. The critical principle is that ASC 715 requires full funded status recognition on the balance sheet, with unrecognized items affecting only equity through AOCI until they are amortized to expense.

Question 5

1. $900,000, equal to the cash contributed during 20X5.
2. $1,200,000, with$300,000 accrued as a liability at December 31, 20X5. (correct answer)
3. $1,200,000, with$300,000 recorded in AOCI at December 31, 20X5.
4. $0, because defined contribution plans do not require expense recognition until benefits are paid to retirees.

Explanation: For defined contribution plans under FASB ASC 715, the employer's obligation is limited to the contribution required for each period, with expense recognition based on the contribution formula applied to covered compensation, not cash payments. The required contribution is: $20,000,000 × 6$1,200,000, which represents the full expense for 2025 regardless of payment timing. The $300,000 unpaid portion ($1,200,000 - $900,000 paid) is accrued as a liability at year-end. Answer A incorrectly limits expense to cash paid, violating accrual accounting. Answer C incorrectly suggests recording the accrual in AOCI, when defined contribution obligations are straightforward liabilities. Answer D incorrectly denies any expense recognition for defined contribution plans. The key principle is that defined contribution accounting is simpler than defined benefit accounting—expense equals the period's required contribution with no actuarial complexities, and any unpaid amounts are current liabilities.

Question 6

1. Report a net pension liability of $4,000,000 because the PBO must be recognized as a liability regardless of plan assets.
2. Report a net pension asset of $4,000,000 because plan assets exceed the PBO. (correct answer)
3. Report both a pension asset of $44,000,000 and a pension liability of$40,000,000, netting only in the footnotes.
4. Report no asset because overfunded plans are not recognized until amounts are refunded by the plan trustee.

Explanation: Under FASB ASC 715, when plan assets exceed the projected benefit obligation (PBO), the overfunded amount is recognized as a net pension asset on the statement of financial position. The pension asset is: plan assets $44,000,000 - PBO$40,000,000 = $4,000,000 overfunded. This represents the employer's net economic position in the plan, subject to considerations about asset recoverability through refunds or contribution holidays. Answer A incorrectly suggests always reporting a liability regardless of funding status. Answer C incorrectly requires gross presentation when ASC 715 mandates net presentation of funded status. Answer D incorrectly denies asset recognition for overfunded plans, when ASC 715 requires symmetrical treatment of overfunded and underfunded positions. The professional framework recognizes that overfunded plans represent economic resources controlled by the employer, though subject to regulatory restrictions and potential asset ceiling tests under certain circumstances.

Question 7

1. $550,000 (correct answer)
2. $850,000
3. $800,000
4. $450,000

Explanation: Under FASB ASC 715, net periodic postretirement benefit cost for plans other than pensions follows the same calculation framework as pension plans, including service cost, interest cost, and expected return on plan assets (if funded). The calculation is: service cost $500,000 + interest cost$400,000 - expected return on plan assets $350,000 =$550,000. Benefits paid and employer contributions affect the APBO and plan assets but do not directly impact periodic expense recognition. Answer B incorrectly adds the expected return instead of subtracting it. Answer C omits the expected return entirely. Answer D incorrectly calculates a net of various items that don't belong in expense. The key principle is that postretirement benefit accounting mirrors pension accounting in expense recognition, with the main difference being that most postretirement plans are unfunded or partially funded compared to pension plans.

Question 8

1. Increase pension expense by $140,000 and decrease AOCI by$140,000. (correct answer)
2. Decrease pension expense by $140,000 and increase AOCI by$140,000.
3. Increase pension expense by $140,000 and increase AOCI by$140,000.
4. Recognize a $140,000 loss in net income with no effect on AOCI because actuarial gains/losses are not recorded in equity.

Explanation: Under FASB ASC 715, when unrecognized actuarial losses in accumulated other comprehensive income (AOCI) are amortized as part of net periodic pension cost, the amortization increases pension expense and simultaneously reduces the unrecognized loss balance in AOCI through a reclassification adjustment. The $140,000 amortization increases pension expense (debit) and decreases AOCI (credit), effectively moving the loss from equity to the income statement. Answer B incorrectly suggests decreasing pension expense, which would occur only with gain amortization. Answer C incorrectly shows both accounts increasing, violating the reclassification principle. Answer D incorrectly states that actuarial items bypass AOCI, when ASC 715 specifically requires initial recognition in other comprehensive income. The key framework is that amortization of losses increases expense while amortization of gains decreases expense, with corresponding opposite effects on AOCI to maintain the articulation between comprehensive income components.

Question 9

1. Recognize the $900,000 gain in net income as a reduction of pension expense in 20X5.
2. Recognize the $900,000 gain in other comprehensive income and include it in AOCI at December 31, 20X5. (correct answer)
3. Recognize the $900,000 gain as a direct increase to plan assets on the statement of financial position.
4. Defer recognition of the $900,000 gain off-balance sheet until it is realized through benefit payments.

Explanation: Under FASB ASC 715, actuarial gains and losses arising during the period are initially recognized in other comprehensive income and accumulated in AOCI, not immediately recognized in net income. The $900,000 actuarial gain increases other comprehensive income (credit) and reduces the net actuarial loss position in AOCI, improving the entity's equity position without affecting current period pension expense. Answer A incorrectly requires immediate income recognition, which would occur only through corridor amortization of accumulated amounts. Answer C incorrectly suggests a direct balance sheet adjustment to plan assets, when actuarial gains affect only the PBO measurement. Answer D incorrectly proposes off-balance sheet treatment, violating the comprehensive recognition requirements. The framework for actuarial items follows a two-step process: initial OCI recognition preserves income statement stability, followed by systematic amortization when accumulated amounts exceed the corridor threshold.

Question 10

1. Credit other comprehensive income $270,000
2. Credit other comprehensive income $30,000
3. Debit other comprehensive income $150,000
4. Debit other comprehensive income $30,000 (correct answer)

Explanation: When you encounter pension accounting questions, focus on the relationship between the funded status and the balance sheet recognition. The funded status equals plan assets minus the projected benefit obligation, and any difference between this amount and what's currently recorded requires an adjustment through other comprehensive income. Here, the funded status is $1,650,000 -$1,800,000 = -$150,000 (underfunded). Since the company previously recognized a net pension liability of$120,000, but the actual underfunded amount is $150,000, you need to increase the liability by$30,000. This increase in liability requires a debit to other comprehensive income for $30,000. Answer A incorrectly credits other comprehensive income for $270,000, which appears to add the previously recognized liability to the current underfunded amount rather than calculating the adjustment needed. Answer B credits other comprehensive income for$30,000, which has the right amount but wrong direction—credits would decrease the liability when you actually need to increase it. Answer C debits other comprehensive income for $150,000, which represents the total funded status rather than the adjustment needed from the previously recorded amount. Remember that pension liability adjustments flow through other comprehensive income, not the income statement. Always calculate the difference between what should be recorded (the funded status) and what is currently recorded to determine your adjustment amount. The direction depends on whether you're increasing or decreasing the liability—increases require debits to OCI.

Question 11

1. Service cost and interest cost components
2. Actuarial gains and losses exceeding the corridor amount (correct answer)
3. Expected return on plan assets component
4. Amortization of prior service cost component

Explanation: Under current GAAP, actuarial gains and losses are recognized immediately in other comprehensive income in the period they occur, then subsequently amortized from accumulated OCI to pension expense if they exceed the corridor (10% of the greater of PBO or plan assets). Choice A is incorrect because service cost and interest cost are components of pension expense. Choice C is incorrect because expected return reduces pension expense. Choice D is incorrect because amortization of prior service cost is a component of pension expense.

Question 12

1. $16,000
2. $18,000
3. $0 (correct answer)
4. $2,000

Explanation: When you encounter pension accounting questions involving actuarial gains and losses, you need to understand the corridor approach for determining amortization from accumulated other comprehensive income. The corridor approach requires amortization only when unrecognized actuarial gains or losses exceed 10% of the greater of the projected benefit obligation (PBO) or fair value of plan assets. First, calculate the corridor threshold: the greater of $2,000,000 PBO or$1,800,000 plan assets is $2,000,000. Ten percent of this amount equals$200,000. Since Theta's unrecognized actuarial losses of $180,000 are less than the$200,000 corridor threshold, no amortization is required in 2024. The losses remain in accumulated other comprehensive income without affecting pension expense. Answer A ($16,000) incorrectly assumes amortization is required and represents the excess over a 10$180,000 - $180,000 =$0, then dividing something by 10 years). Answer B ($18,000) makes the same error but uses the full loss amount divided by 10 years ($180,000 ÷ 10). Answer D ($2,000) appears to be an arbitrary calculation without proper application of the corridor method. Remember this key pattern: calculate 10% of the greater of PBO or plan assets first. Only amounts exceeding this corridor get amortized over the average remaining service period. Many CPA candidates forget to check whether the corridor threshold is exceeded before calculating amortization—always verify this step first.

Question 13

1. $35,000
2. $30,000
3. $40,000
4. $45,000 (correct answer)

Explanation: When you encounter pension plan amendments that grant retroactive benefits, you're dealing with prior service cost amortization. The key principle is that prior service costs are typically amortized over the average remaining service period of affected employees, but you must account for employees who leave before the full amortization period ends. Here's how to calculate the 2024 amortization: Start with the total prior service cost of $240,000 divided by the 8-year average remaining service period, giving you a baseline annual amortization of$30,000. However, when an employee retires during the year, their entire attributed prior service cost must be recognized immediately in that year's amortization expense. The calculation becomes: $30,000 (regular amortization) +$15,000 (immediate recognition for retired employee) = $45,000 total prior service cost amortization for 2024. Answer A ($35,000) incorrectly assumes you only add half of the retired employee's cost, perhaps thinking it should be prorated for partial year service. Answer B ($30,000) represents the trap of using only the straight-line amortization without accounting for the retired employee's accelerated recognition. Answer C ($40,000) appears to use an incorrect calculation method, possibly dividing by the wrong time period. The correct answer is D ($45,000). Study tip: Remember that employee departures always accelerate prior service cost recognition. When someone leaves, their entire remaining unamortized portion hits the income statement immediately, regardless of timing within the year.

Question 14

1. As a reduction to postretirement benefit expense in the current period
2. As a credit to other comprehensive income in the current period (correct answer)
3. As a deferred credit to be amortized over future periods
4. As an increase to plan assets at fair value

Explanation: Under current GAAP, actuarial gains and losses are recognized immediately in other comprehensive income in the period they occur. The $75,000 actuarial gain would be credited to OCI and would reduce the net postretirement benefit liability. Choice A is incorrect because actuarial gains/losses are not immediately recognized in expense. Choice C reflects the old corridor approach that is no longer used. Choice D is incorrect because actuarial gains/losses relate to obligation changes, not plan asset changes.

Question 15

1. $108,000 (correct answer)
2. $98,000
3. $88,000
4. $118,000

Explanation: Net periodic pension cost includes: Service cost $95,000 + Interest cost$78,000 - Expected return on plan assets $85,000 + Amortization of prior service cost$12,000 + Amortization of net actuarial loss $8,000 =$108,000. Choice B incorrectly excludes the amortization of net actuarial loss. Choice C incorrectly excludes both amortization components. Choice D incorrectly adds the employer contributions, which affect the funded status but not the periodic pension cost.

Question 16

1. $94,250 loss
2. $9,250 gain
3. $9,250 loss (correct answer)
4. $6,750 gain

Explanation: Pension accounting questions test your understanding of how gains and losses on plan assets flow through other comprehensive income (OCI). When actual returns differ from expected returns, the difference creates a gain or loss that affects OCI rather than immediate pension expense. To find the difference between expected and actual return, you need to calculate the expected return first. Expected return equals the fair value of plan assets at the beginning of the year multiplied by the expected rate of return: $1,450,000 × 6.5\% = 94,250$. The actual return was given as $85,000. The difference is $94,250 - 85,000 = 9,250$. Since the actual return ($85,000) was less than expected ($94,250), this creates a loss that will be recorded in OCI. Therefore, the answer is C) $9,250 loss. Answer A ($94,250 loss) incorrectly treats the entire expected return as a loss, ignoring the actual return earned. Answer B ($9,250 gain) calculates the correct dollar amount but reverses the gain/loss treatment—when actual returns fall short of expectations, it's always a loss, not a gain. Answer D ($6,750 gain) appears to use an incorrect calculation, possibly confusing the discount rate with the expected return rate. Remember this pattern: when actual return < expected return = loss to OCI; when actual return > expected return = gain to OCI. The expected return calculation always uses beginning-of-year plan assets, and these differences smooth out pension expense volatility over time.

Question 17

1. $1,079,000 (correct answer)
2. $1,051,000
3. $1,023,000
4. $966,000

Explanation: The APBO rollforward includes: Beginning APBO $890,000 + Service cost$65,000 + Interest cost $53,000 + Actuarial loss$28,000 + Plan amendment $85,000 - Benefits paid$42,000 = $1,079,000. Choice B omits the plan amendment. Choice C omits the actuarial loss. Choice D incorrectly subtracts the actuarial loss and plan amendment instead of adding them.