Question

Under its post-employment benefit plan, Entity A agrees to make annual contributions of P500,000 to a retirement fund. When an employee retires, he or she is entitled to a lump sum payment and monthly pension payments to be determined based on the level of contributions and the investment performance of the fund.

In 2018, due to cash flow problems, Entity A was only able to contribute half of the agreed contributions. In 20x2, Entity A contributed P900,000 to the fund. How much retirement benefit expenses should Entity A recognize in 2018 and 20x2, respectively?
2018 20x2
a. 200,000 900,000
b. 200,000 500,000
c. 500,000 600,000
d. 500,000 500,000

Answer 1

Entity A should recognize P500,000 for both 2018 and 20x2 for retirement benefit expenses, as it is the agreed annual amount despite actual contributions being different.

Step-by-step explanation:

When determining how much retirement benefit expenses should Entity A recognize in 2018 and 20x2, we must consider that Entity A was only able to contribute half of the agreed P500,000 in 2018 due to cash flow problems, which amounts to P250,000. However, Entity A agreed to make annual contributions of P500,000. Therefore the expense recognized in 2018 should be the agreed amount, since in accounting, the expense is recognized when the company incurs the obligation.

The correct amounts for retirement benefit expenses that Entity A should recognize are P500,000 for both 2018 and 20x2. Therefore, the option d. 500,000 500,000 is the correct answer.