Chapter 20 Pensions

Question 1

What is a defined contribution plan?

Answer 1

The employer agrees to contribute a certain amount to the employee’s retirement. There is no gurantee how many benefits will be there at retirement

Question 2

What is a defined benefit plan?

Answer 2

The employer agrees to provide a certain amount of benefits to the employee retirement. Employers make contributions to the employee’s pension account, which are invested.

Question 3

What are the cons of a defined contribution plan?

Answer 3

No guarantee of benefits. The employee bears the risk.

Question 4

What are the pros of a defined benefit plan?

Answer 4

Employee is granted certain retirement benefits

Question 5

What are the cons of a defined benefit plan?

Answer 5

Complex accounting, not portable, employee has no control over the investments. The employer bears the risk.

Question 6

What is the general formula for a pension benefit plan?

Answer 6

A percentage x years of service x salary

Question 7

What is a funded pension plan?

Answer 7

These plans involve The firm, a pension fund, and the retired employee. The firm makes contributions to pension fund as time goes on, the pension fund invests the funds and ultimately writes the employer a check.

Question 8

What is a unfunded pension plan?

Answer 8

These plans involve only the firm and the retired employee. The firm basically says, “trust me… When the time comes for you to retire, I’ll write you a check for what you are due.”

Question 9

What is ERISA?

Answer 9

Employee retirement income security act

Federal legislation that, among other things, says if you are an employer of a certain size (doesn’t have to be too big close parentheses, you cannot have unfunded pension plans in the US (small firms, churches, and government employers are excluded.)

Question 10

What government entity guarantees minimum minimum benefits from pension plans?

Answer 10

Pension benefit guarantee corporation

Question 11

How do you account for defined-contribution plans?

Answer 11

Each year the firm makes a defined contribution to the employees retirement account, based on a specified formula. When they write this check the journal entry is:

Pension Expense xxx
Cash xxx

Question 12

How do you account for defined benefit plans?

Answer 12

These pension plans have assets (contributions plus income earned on contributions) and a liability (the obligation to company has to its employee close parentheses. To account for a pension plan, the company must know what amount of plan assets, pension obligation and pension expense recordings financial statements.

Question 13

Are plant assets on the employer’s financial statements? (Yes or no)

When can an employee access plan assets?

Answer 13

No, plan assets are not on the employer’s financial

The employer can only access them in the event of plan termination

Question 14

Journal entry to record contributions to plan assets

Answer 14

Plan assets xxx

Cash xxx

Question 15

Journal entry to record benefits paid out of plan assets?

Answer 15

PBO (memo account)

Plan assets

Question 16

What is pension liability?

Answer 16

As soon as I company implemented pension plan, they have made a promise to provide benefits to their employees upon retirement and are legally obligated to do so. This and meets the fasb’s definition of a liability.

Question 17

What is vested benefit obligation (vbo)?

Answer 17

Reflects those benefits that have vested to the employee using current salary levels. Festive benefits are ones that the employee is legally entitled to receive if they were to stop working immediately.

Question 18

What is accumulated benefit obligation (ABO) ?

Answer 18

Reflects both vested and invested benefits of current salary levels.

Question 19

What is projected benefit obligation (PBO)?

Answer 19

Reflects both invested in non-vested benefits that projected (future) the salary levels. This is what the fast be settled on companies must report the present value of vested in non-vested benefits that accrue to date based on employees future projected salary levels.

Question 20

What is funded status?

Answer 20

The difference between the plans pebeo and the fair value of the plan assets. This is considered by many to be the critical measure of a plan’s health.

Question 21

If plan assets are less than pebeo the plan is considered _____?

Answer 21

Underfunded

Question 22

If plan assets are greater than PBO the plan is considered____?

Answer 22

Overfunded

Question 23

What are the five components of pension expense?

Answer 23

1) service cost (+)
2) interest expense (+)
3) actual return on plan assets (+/-)
4) Amortization of Prior service cost (+)
5) unexpected gains and losses on plan assets and a query real gains and losses on pension obligation (+/-)

Question 24

How do you calculate service cost?

What is the journal entry?

Answer 24

Service cost is equal to the present value of new pension benefits earned by employees during the year.

Pension expense
PBO

Question 25

How do you calculate interest expense on the pbo?

What is the journal entry?

Answer 25

Interest expense on the p b o is equal to the increase in the PBO due to the passage of time.

Pension Expense
PBO

Question 26

What is the actual return on plan assets?

Answer 26

The increase in pension fund assets from interest, dividends, and realized on realize this change in the fair value of plan assets.

Question 27

How do you calculate actual return on plan assets?

Answer 27

Actual return= ending balance of plan assets minus beginning balance - (contributions - benefits paid)

Question 28

What is amortization of prior service cost (PSC) ?

Answer 28

At the inception of the pension plan, if the firm gives credit for prior service, there is an immediate one-time increase in the PBO (based on all the work employees have already performed and will get credit for)

Question 29

Journal entry to record PS see when plan is initiated or amended

Answer 29

OCI-PSC

PBO

Question 30

Journal entry to amortize PSC into pension expense

Answer 30

Pension expense

OCI- PSC

Question 31

What are the two methods that can be used to amortize PSC?

Are firms allowed to change methods (yes or no)?

Answer 31

1) straight line- compute the average remaining service life for the employees subject to the new or amended plan and recognize the PSE ratably over that period.
2) years of service method- compute the p s c / remaining service year and amortize expense as remaining service years are provided

Question 32

What are three reasons the fast be prefers the years of service method?

Answer 32

It preserves the matching principle

It results in decline amortization over time, as a firm gets fewer benefits

The employees who are getting the most credit for prior service are likely those closest to retirement so makes sense take more and return station in the earlier years of the pension plan

Question 33

What are unexpected gain / loss on plant assets?

Answer 33

The unexpected gain or loss on plan assets is equal to actual return - expected return which is reported in oci.

Question 34

What are actuarial gains / loss on pension liability?

Answer 34

The PBO is a function of a lot of a query assumptions. These assumptions are really accurate and when they change, so too should the PBO.

These gains (PBO goes down) and losses (PBO goes up) are accumulated in OCI.

Question 35

What is the corridor approach and why do we use it?

Answer 35

Because asset and liability gain / loss is accumulated in oci can offset each other, the net amount reported and accumulated oci shouldn’t grow too large. But, if they ever do get to Big (in either direction close parentheses, we need to recognize some of these gains or losses on the income statement and allow these losses to flow into pension expense.

Question 36

Four steps to using the corridor project in determining the balance in oci

Answer 36

1) calculate 10% of beginning PBO and 10% of beginning PA. See which is larger.
2) compare the beginning balance in oci g/l to 1)
3) if 2 > 1 then the excess is subject to amortization
4) amortize G/L = excess / the average service life of active employees