UNIT 5

AUDIT OF EMPLOYEE BENEFITS

Estimated Time: 3.0 HOURS
*Use Louwers 4th edition

Discussion Questions 5-1: Nature of Employee Benefits

1. Define the following terms:
a.
b.
c.
d.
e.

Short-term employee benefits

Defined Contribution Plan
Defined Benefit Plan
Other long term employee benefits
Termination benefits

2. How are the items above being accounted under the current International
Accounting Standards (IAS) No. 19?

Problem 5-1: Short-term employee benefits; Compensated Sick and Vacation Leaves

San Pablo Corporation, began operation on January 2, 2007 with 250 employees.
The company provides its employees 2 weeks paid sick leave and 2 weeks paid
vacation leave every operating year. The companys policy on sick leave and
vacation leave allows each employee to carry over accumulated leaves for the
current period over the next year only. The same shall be forfeited if not availed over
the said period allowed.
On December 31, 2007, records showed that there are 55 employees who are yet to
avail of any leave, while there are 25 employees who have 2 weeks remaining
unused vacation and sick leaves combined. Employees had an average daily wage
rate of P250.
On December 31, 2008, records show that 925 days vacation and sick leaves carried
over from the last operating period were exercised and paid in 2008. In addition,
there are 30 employees who have 6 weeks accumulated unused sick leaves and
vacation leaves combined, 25 employees who have accumulated 3 weeks unused
sick leaves and 2 weeks unused vacation leaves; 30 employees who have
accumulated 3 weeks unused sick leaves and vacation leaves combined;; 10
employees who have accumulated 1 week unused sick leave. The daily wage rate is
now P275.
Required:
a) How much liability for compensated absences should be included as part of
current liabilities as of December 31, 2007?
b) How much liability for compensated absences should be included as part of
current liabilities as of December 31, 2008?
c) How much is the net adjustment for the accrual for the year ended 2008?

Problem 5-2 Short term employee benefits, profit sharing

A profit sharing plan requires an enterprise to pay a specific proportion of its net profit
of the year to employees who serve throughout the year.
If no employees leave during the year, the total profit sharing payments for the year
will be 3 % of net profit. Staff turnover will reduce the payments proportionately.
The number of employees at December 31, 2013 was 100. 10 employees have left
during 2014.
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The net profit of the year 2014 is 1,000,000.

Required:
Calculate the amount of the liability for profit sharing at the end of 2014.

Problem 5-3 Short Term Employee Benefits; Bonus Computation

JFC Food Corporation grants bonus to the companys president. Said bonus is
expressed as a percentage of income before bonus but after tax. Bonus rate is 10%.
In addition, the basic bonus will be increased by the companys tax savings because
the total amount of bonus is deductible in computing the companys taxable income.
JFC registered a net income of P100,000 in 2010 before bonus and 30% tax.
Required:
a. How much is the 2010 bonus?
b. How much is the income tax?
c. How much is the tax savings?
d. How much is the net income for 2010 after bonus and tax?

Problem 5-4: Post-Employment Benefit Plan, Retirement Expense and Prepaid

Benefit Asset/Obligation; Basic Concept
On January 1, 2013, an entity has the following balances in its records with respect to
a defined benefit plan:
Fair value of plan assets
Accrued Benefit Obligation

P 4,000,000
5,000,000

During the year, the accountant determined that service cost is P1,550,000. Interest
cost is to be recognized at 10% and the expected and actual return on plan assets is
12%. The enterprise funds P1,500,000 into the plan at the end of the year. The
additional funding of the Company is booked as retirement benefit expense.
Required:
1. Compute for the following:
a. Accrued Benefit Obligation
b. Fair Value of Plan Assets
c. Calculate the retirement benefit expense
2. Prepare the entry to record the retirement benefit expense.
3. Calculate the balance of the prepaid/accrued retirement benefit cost on
December 31, 2013.

Problem 5-5: Post-Employment Benefit Plan, Retirement expense and Current

Service Cost; Reconstruction
Siamsi SupSup Inc. has an unfunded defined benefit pension plan. For the year
ending December 31, 2012, the auditor was able to get the following information:
Projected Benefit Obligation, January 1
P13,800,000
Fair Value of Plan Asset, January 1
15,105,000
Expected Return on Plan assets
1,350,000
Actual Return on Plan Assets
1,485,000
Amortization of Deferred Gain
97,500
Employer contribution
1,275,000
Benefits paid to retirees
1,170,000
Settlement Rate
11%
Projected Benefit Obligation, December 31,
14,187,000

There were no actuarial losses for the projected benefit obligation during the period.

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Required: Compute for the following:

1.
Current Service Cost
2.
Fair Value of Plan Asset
3.
Net Benefit Expense

Problem 5-6: Post Employment Benefit Plan; Defined Benefit Plan

The benefit pension plan of Drug Pu Sir, Inc. is as follows:
Projected benefit obligation, Jan 1, 2012
Projected benefit obligation, December 31, 2012
Fair Value of Plan Assets, Jan 1, 2012
Fair Value of Plan Assets, December 31, 2012
Benefits paid in 2012
Settlement rate
Rate of expected return on plan asset
Actuarial loss on plan asset

840,000.00
922,500.00
770,000.00
830,000.00
66,000.00
10%
8%
50,500.00

Required:
1. What is the amount of current service cost for 2012?
2. What is the actual return on plan asset for 2012?

Problem 5-7: Post Employment Benefit Plan; Defined Benefit Plan - Reconstruction
The benefit pension plan of Ray Sir, Inc. (RSI) is as follows:
Projected benefit obligation, Jan 1, 2012
Projected benefit obligation, December 31, 2012
Fair Value of Plan Assets, Jan 1, 2012
Fair Value of Plan Assets, December 31, 2012
Benefits paid in 2012
Current service cost
Contributions

1,020,000.00
1,175,200.00
890,000.00
1,003,100.00
77,000.00
120,000.00
110,000.00

Required:
1. What is the settlement rate in 2012?
2. What is the expected rate of return on plan asset?

Problem 5-8 Defined Benefit Plan; Accrued Benefit Obligation

You gathered the following information related to Luna Lovegood Companys defined
benefit plan for the year-ended December 31, 2012:

Current service cost of providing benefits for the year ended December 31,
2012: P68,000,000.
Average remaining working life of employees: 10 years
Benefits paid to retired employees for the year: P48,300,000
Contributions paid to the fund: P34,500,000
Present value of obligation to provide benefits: P4,560,000,000 at January 1,
2012, and P5,230,000,000 at December 31, 2012.
Fair value of plan assets: P4,200,000,000 at January 1, 2012, and
P5,030,000,000 at December 31, 2012
Net cumulative unrecognized gains at January 1, 2012: P483,000,000
Unamortized Past service cost, beginning: P223 million.

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Discount rates and expected rates of return on plan assets:

1/1/2012
Discount rate
6%
Expected rate of return on plan assets
8%

1/1/2013
6%
8%

Required:
Based on the above and the result of your audit, answer the following:
1. How much accrued/prepaid retirement benefit is to be recognized on the balance
sheet as of January 1, 2012?
2. How much is the actuarial gain to be recognized in the income statement for the
year ended December 31, 2012?
3. How much is the net benefit expense to be recognized on the income statement
for the year ended December 31, 2012?
4. How much is the unrecognized actuarial gain as of December 31, 2012?
5. How much accrued/prepaid retirement benefit is to be recognized on the balance
sheet as of December 31, 2012?

Problem 5-9 Audit Simulation: Basic Salaries Expense

You are engaged to audit a rural bank in Tagum, Mindanao for the period ended
December 31, 2009. To examine the reasonableness of the Banks basic salaries
expense account, you requested the Banks Human Resource Group to provide you a
list of employee showing details as to salary rate and employment period.

Inquiry to the Banks accountant disclosed that amount of overtime pay included in
the salaries expense account is deemed immaterial?

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Required:
1. Prepare an audit working paper showing the estimated salaries expense
per audit.
2. If the recorded salaries expense per books is P1,867,495.19, how much
is the difference between the estimate salaries expense?

Problem 5-10 Audit Working Paper Preparation

You were engaged as the auditor of Ondoy Corporation. During your audit fieldwork,
you noted the following accounts/information regarding the Companys Defined
Benefit Obligation.

The Companys accountant made a representation that they only adjust pension
liability based on the auditors proposed adjustments.
Required:
Prepare an audit working paper to show the following:
a. Present Value of obligation, ending
b. Fair value of plan assets, ending
c. Unrecognized Actuarial Losses, ending
d. Retirement Expense
e. Net Liability

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