Employee Benefits
Employee Benefits
Employee 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 2022
4,000,000 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.
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.
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?
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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 Present value of 1
7 .452
8 .404
9 .361
10 .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
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 5,750,000
Projected benefit obligation. 6,500,000
The actuary provide the following information for year ended December 31, 2021:
Current service cost 600,000
Settlement discount rate 10%
Expected return on plan assets 8%
Actual return on plan assets 700,000
Contribute on plan 900,000
Benefit paid to retirees 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.
The account revealed the following information for the current year.
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Required:
1. Determine the employee benefit expense fi the current year.
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
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 6,500,000
Projected benefit (7,500,000)
Prepaid/accrued benefit cost (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.
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.
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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.
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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:
SY Pee AYE
Daily wage 1,500 2,500 4,000
Unused sick leave as of January 1, 2022 10 6 4
Sick leave earned in 2022 10 10 10
Sick leave taken in 2022 7 9 6
Wage increase effective January 1, 2022 20% 25% 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:
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:
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 20,000
Multiply by the total number of employee 200
Liability for termination benefit 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 60,000
Termination benefit (___20,000)
Short-term employee benefit 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 155,000
Total liability 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 585,000
Accrued pension cost 45,000
Liability for termination benefits 630,000
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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.
The following balances were obtained from the records of GERBY CORP for its defined benefit
plan:
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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:
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
10. How much is the actual return on plan assets for the year 2025?
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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 B. P220,000 C. P300,000 D. P560,000
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