CPA Financial Accounting and Reporting Far Quiz: Employee Benefit Plan Financial Statements

What this quiz covers

This quiz focuses on Employee Benefit Plan Financial Statements, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

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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. Statement of Financial Position and Statement of Activities.
2. Statement of Net Assets Available for Benefits and Statement of Changes in Net Assets Available for Benefits. (correct answer)
3. Balance Sheet and Statement of Operations and Changes in Funded Status.
4. Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position.

Explanation: U.S. GAAP requires defined benefit pension plans to present a Statement of Net Assets Available for Benefits and a Statement of Changes in Net Assets Available for Benefits. Disclosures regarding the actuarial present value of accumulated plan benefits are also required.

Question 2

1. To provide information about the plan's present and future ability to pay benefits when due. (correct answer)
2. To assist the sponsoring employer in determining the annual required contribution to the plan.
3. To report on the plan sponsor's stewardship of plan assets and its net periodic pension cost.
4. To provide information that is useful in assessing the performance of the plan's investment manager.

Explanation: The primary objective of a pension plan's financial statements is to provide financial information that is useful in assessing the plan's present and future ability to pay benefits when due. This involves reporting on the plan's resources and the claims against those resources.

Question 3

1. The 401(k) plan is not required to report investments at fair value.
2. The 401(k) plan does not report an actuarial present value of accumulated plan benefits. (correct answer)
3. The 401(k) plan presents a Statement of Activities instead of a Statement of Changes in Net Assets.
4. The 401(k) plan's financial statements are consolidated with the sponsoring employer's statements.

Explanation: Defined contribution plans, such as 401(k)s, do not guarantee a specific benefit amount at retirement. Therefore, there is no need to calculate or disclose an actuarial present value of accumulated plan benefits. The obligation of the plan is limited to the value of the individual participant accounts. Both plan types report investments at fair value and present a Statement of Changes in Net Assets.

Question 4

1. At fair value. (correct answer)
2. At historical cost.
3. At amortized cost.
4. At the lower of cost or market.

Explanation: U.S. GAAP (specifically ASC 960) requires that investments of a defined benefit pension plan, including stocks, bonds, and real estate, be reported at their fair value. This provides the most relevant information for assessing the plan's ability to meet its obligations.

Question 5

1. $12 million.
2. $2 million.
3. $10 million.
4. $0. (correct answer)

Explanation: The statement of net assets available for benefits reports the plan's assets and liabilities (such as benefits currently due and payable). The actuarial present value of accumulated plan benefits is not a liability on this statement; it is required to be disclosed in the notes to the financial statements. The difference between net assets and this actuarial amount ($2 million underfunded status) is also a disclosure, not a line item on the statement itself.

Question 6

1. $5,350,000
2. $5,180,000 (correct answer)
3. $5,130,000
4. $5,000,000

Explanation: Net assets available for benefits are calculated as total assets minus total liabilities. Total Assets = Investments ($5,000,000) + Cash ($150,000) + Employer contributions receivable ($200,000) =$5,350,000. Total Liabilities = Accrued administrative expenses ($50,000) + Benefits payable ($120,000) = $170,000. Net Assets =$5,350,000 - $170,000 =$5,180,000.

Question 7

1. A single amount that includes both realized and unrealized gains and losses. (correct answer)
2. Two separate amounts for realized gains/losses and unrealized gains/losses.
3. An adjustment to the beginning balance of net assets.
4. A component of other comprehensive income for the plan.

Explanation: U.S. GAAP requires that the statement of changes in net assets available for benefits presents the net appreciation (or depreciation) in the fair value of investments as a single amount. This amount combines both realized gains and losses from sales during the period and the unrealized appreciation or depreciation of investments held at year-end.

Question 8

1. At fair value, with changes reported in the statement of changes in net assets.
2. At contract value, which represents contributions plus interest, less participant withdrawals. (correct answer)
3. At historical cost, with no adjustment for interest earned until maturity.
4. At amortized cost, similar to a held-to-maturity debt security.

Explanation: Benefit-responsive investment contracts, such as certain GICs, are a special class of investment for employee benefit plans. They are reported at contract value, not fair value. Contract value is the principal balance plus accrued interest, representing the amount participants would receive if they were to initiate a transaction. The fair value of the contract must still be disclosed.

Question 9

1. As a long-term liability on the statement of net assets available for benefits.
2. As a reduction of equity on the statement of net assets available for benefits.
3. As a disclosure in the notes to the financial statements. (correct answer)
4. As a non-operating expense in the statement of changes in net assets available for benefits.

Explanation: For a defined benefit plan, the actuarial present value of accumulated plan benefits is a required disclosure. It is not recorded as a liability on the face of the statement of net assets available for benefits. The financial statements themselves focus only on the net assets, while the disclosure provides the other side of the equation to assess the plan's funded status.

Question 10

1. Current and noncurrent benefits.
2. Operating and non-operating benefits.
3. Vested and nonvested benefits. (correct answer)
4. Employer-funded and employee-funded benefits.

Explanation: The required disclosures for the actuarial present value of accumulated plan benefits must provide a breakdown showing the amounts attributable to vested benefits and the amounts attributable to nonvested benefits. This helps users assess the portion of benefits that participants are entitled to even if they terminate employment.

Question 11

1. The change in the actuarial present value of accumulated plan benefits.
2. The net appreciation or depreciation in fair value of investments. (correct answer)
3. The projected benefit obligation.
4. The funded status of the plan.

Explanation: The statement of changes in net assets available for benefits reflects the changes in the plan's assets and liabilities during the period. It includes contributions, investment income (including the net appreciation/depreciation in fair value), benefit payments, and administrative expenses. The change in the actuarial present value of accumulated plan benefits, the projected benefit obligation, and the funded status are related to the sponsor's accounting or are disclosure items for the plan, not components of this statement.

Question 12

1. A single line item for investments, representing the sum of all participant-directed accounts. (correct answer)
2. Separate line items for each major class of participant-directed investments.
3. The projected benefit obligation based on expected future salary levels.
4. A liability for future benefit payments to current employees.

Explanation: For a defined contribution plan, the statement of net assets typically presents investments as a single line item. The notes to the financial statements then provide the required detail about the different investment types. Defined contribution plans do not have a projected benefit obligation or a liability for future benefits, as the benefit is simply the value of the participant's account.

Question 13

1. It should be excluded from the financial statements but described in the funding policy note.
2. It should be reported as a liability on the statement of net assets available for benefits. (correct answer)
3. It should be recorded as a direct reduction of the plan's net assets.
4. It should be disclosed in the notes, similar to accumulated plan benefits in a pension plan.

Explanation: Unlike pension plans, health and welfare plans that provide postretirement benefits are required to report the obligation for those benefits as a liability on the face of the statement of net assets available for benefits, not just as a disclosure. This reflects a fundamental difference in the accounting standards for these two types of plans.

Question 14

1. Benefit payments made to a retired executive of the sponsoring company.
2. The purchase of publicly traded bonds of the sponsoring company. (correct answer)
3. Payment of administrative fees to a non-related third-party recordkeeper.
4. The receipt of employee contributions via payroll deduction.

Explanation: A party-in-interest includes the sponsoring employer. Therefore, any investment by the plan in the securities of the sponsor (e.g., buying its bonds or stock) is a party-in-interest transaction and must be disclosed. Benefit payments to participants, fees to unrelated service providers, and normal employee contributions are not considered party-in-interest transactions in this context.

Question 15

1. No special disclosure is required as long as the investment is not in the sponsoring company.
2. The plan must disclose the investment strategy that led to this allocation.
3. The plan must disclose the concentration of the investment because it exceeds 5% of net assets. (correct answer)
4. The plan must obtain an independent appraisal of the investment and disclose the result.

Explanation: U.S. GAAP requires disclosure of any investment that represents 5% or more of the net assets available for benefits. This is known as a concentration of risk disclosure. The rule applies to investments in any single entity, security, or real estate project, regardless of whether it is a party-in-interest.

Question 16

1. As investment income.
2. As an employer contribution.
3. As a prior period adjustment to the beginning balance of net assets.
4. As a separate line item under additions. (correct answer)

Explanation: Transfers of assets from other plans are a type of addition to a plan's net assets. They should be presented separately from contributions and investment income to provide clarity on the source of the increase. It is not considered investment income or a contribution from the sponsor.

Question 17

1. As property, plant, and equipment, measured at cost less accumulated depreciation. (correct answer)
2. As an investment, measured at fair value.
3. As a prepaid expense, amortized over its useful life.
4. It should not be reported as an asset of the plan.

Explanation: Assets used in the plan's operations, such as buildings, furniture, and equipment, are reported at their historical cost less accumulated depreciation. They are not considered investments and therefore are not measured at fair value. They are assets of the plan necessary for its administration.

Question 18

1. Modified cash basis.
2. Cash basis.
3. Accrual basis. (correct answer)
4. Regulatory basis.

Explanation: Employee benefit plan financial statements prepared in accordance with U.S. GAAP must use the accrual basis of accounting. This means that revenues (contributions, investment income) are recognized when earned and expenses (benefits, administrative costs) are recognized when incurred, regardless of when cash is received or paid.

Question 19

1. $1,000,000
2. $1,400,000
3. $1,600,000
4. $2,000,000 (correct answer)

Explanation: Total additions to net assets is the sum of all sources of increases. This includes contributions from employers and/or employees, and total investment income. Total investment income is the sum of interest/dividends and the net appreciation in fair value. Total Additions = Employer Contributions ($1,000,000) + Investment Income ($400,000) + Net Appreciation ($600,000) =$2,000,000.

Question 20

1. $80,000
2. $60,000
3. $20,000 (correct answer)
4. $0

Explanation: The plan's financial statements should only reflect expenses paid by the plan itself. The $20,000 paid from plan assets is a deduction. The$60,000 paid directly by the sponsor is an expense of the sponsor and is not reflected in the plan's statement of changes in net assets. It may, however, be disclosed in the notes.