Kensington plc, a hypothetical company based in the United Kingdom
The following information relates to Questions 1–7
Kensington plc, a hypothetical company based in the United Kingdom, offers its employees a defined benefit pension plan. Kensington complies with IFRS. The assumed discount rate that the company used in estimating the present value of its pension obligations was 5.48 percent. Information on Kensington’s retirement plans is presented in Exhibit 1.
1. At year-end 2010, £28,879 million represents:
A the funded status of the plan.
B the defined benefit obligation.
C the fair value of the plan’s assets.
Correct Answer
Answer: B. The defined benefit obligation.
See explanation at the end.
2. For the year 2010, the net interest expense of £273 represents the interest cost on the:
A ending benefit obligation.
B beginning benefit obligation.
C beginning net pension obligation.
Correct Answer
Answer: C. Beginning net pension obligation.
See explanation at the end.
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3. For the year 2010, the remeasurement component of Kensington’s periodic pension cost represents:
A the change in the net pension obligation.
B actuarial gains and losses on the pension obligation.
C actual return on plan assets minus the amount of return on plan assets included in the net interest expense.
4. Which of the following is closest to the actual rate of return on beginning plan assets and the rate of return on beginning plan assets that is included in then interest income/expense calculation?
A The actual rate of return was 5.56 percent, and the rate included in interest income/expense was 5.48 percent.
B The actual rate of return was 1.17 percent, and the rate included in interest income/expense was 5.48 percent.
C Both the actual rate of return and the rate included in interest income/expense were 5.48 percent.
5. Which component of Kensington’s periodic pension cost would be shown in OCI rather than P&L?
A Service cost
B Net interest (income) expense
C Remeasurements
6. The relationship between periodic pension cost and the plan’s funded status is best expressed in which of the following?
A Periodic pension cost of −£483 = Ending funded status of −£4,774 − Employer contributions of £693 − Beginning funded status of −£4,984.
B Periodic pension cost of £1,322 = Benefits paid of £1,322.
C Periodic pension cost of £210 = Ending funded status of −£4,774 − Beginning funded status of −£4,984.
7. An adjustment to Kensington’s statement of cash flows to reclassify the company’s excess contribution for 2010 would most likely entail reclassifying £210 million (excluding income tax effects) as an outflow related to:
A investing activities rather than operating activities.
B financing activities rather than operating activities.
C operating activities rather than financing activities.
Solutions with Explanation
1. At year-end 2010, £28,879 million represents:
Correct Answer: B. The defined benefit obligation.
Explanation: The defined benefit obligation (DBO) is the present value of future pension benefits that employees have earned based on their service up to the reporting date. In this case, £28,879 million reflects the total amount Kensington plc is obligated to pay its employees under the pension plan, representing the liabilities associated with the defined benefit plan.
2. For the year 2010, the net interest expense of £273 represents the interest cost on the:
Correct Answer: C. Beginning net pension obligation.
Explanation: Net interest expense in a pension context is calculated by applying the discount rate to the net pension obligation at the beginning of the period. In this case, it reflects the interest cost on the beginning net pension obligation (which is essentially the funded status at the start of the year). The calculation would be based on the beginning funded status of -£4,984 million multiplied by the discount rate of 5.48%, which results in a net interest expense of -£273 million.
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