Question

True or false.

1. Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year.
2. The difference between the PBO and the ABO is that the PBO takes into account future salary increases, while the ABO is based on current salaries.
3. Prior service cost is the increase in the PBO because of pension plan amendments.
4. The PBO is a more appropriate measure for pension obligation in the case of firm bankruptcy than the VBO.
5. Other Comprehensive Income related to pension prior service cost is reported as part of net income.
6. Executory costs should be excluded by the lessee in computing the present value of the minimum lease payments.
7. A lessee records interest expense in both a finance lease and an operating lease.
8. No lease liabilities should be reported on the balance sheet if the lease is classified as an operating lease.
9. The lessor should ignore the guaranteed residual value in its calculation of lease receivable.
10. If residual value is unguaranteed, the lessee ignores the residual value in the computation of lease liability.
11. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.
12. A company should add back bond premium amortization to net income to arrive at net cash flow from operating activities.
13. Dividends received from other companies’ stocks should be reported as cash flow from investing activities.
14. Interest paid to creditors should be reported as cash flows from financing activities.
15. Cash paid to the lessor in the case of operating lease should be reported as cash flows from financing activities.

Answer 1

1. Service cost is a cost which an entity has to incur for performing a valuable task by an expert. It is considered as an accumulated benefit obligation and it is incurred due to a service by an employee which will beneficial for future.

Hence, the above statement is true.

2. ABO represents the PV of vested as well as non-vested benefits at the current salary. PBO is the PV of vested as well as non-vested benefits at the future salary.

Hence, the above statement is true.

3. PBO increases due to prior service cost because of which a credit is provided to the employees because of service provided by the employees in the prior years.

Hence, the above statement is true.

4. VBO is considered more appropriate than PBO in case of measuring the pension liability when bankruptcy.

Hence, the above statement is false.

5. Other comprehensive income is some unrealized holding gains and losses which are not included in the net income.

Hence, the above statement is true.

6. In calculating the PV of minimum payment of lease, the executor costs are deducted from by the lessee. Hence, the above statement is true.