Ch 20

Question 0

What are the 2 divisions for pension accounting

Answer 0

1 accounting for employer

2 accounting for the pension fund

Question 1

Pension plan

Answer 1

Arrangement where employer provides benefits (payments)
To retired employees for services they provided in their
Working years

Question 2

Pension fund/plan

Answer 2

1 Entity that receives contributions from employer,

2 administersThe pension assets

3 makes benefit payments to retired employees

Question 3

When is a pension plan funded?

Answer 3

When employer makes payments to funding agency

Question 4

Contributory pension plans

Answer 4

Employees bear part of cost of stated benefits or

Voluntarily make payments to increase their benefits

Question 5

Non contributory pension plans

Answer 5

Employer bears entire cost

Question 6

Qualified pension plans

Answer 6

Offer tax benefits

Question 7

What are the tax benefits of qualified pension plans? 2

Answer 7

1 deductibility of employer’s contributions

2 tax free status of earnings from pension fund assets

Question 8

What should a pension fund be considered in terms of an entity

Answer 8

As a separate legal and accounting entity

Question 9

What are the 2 most common types of pension plans?

Answer 9

1 defined contribution plans

2 defined benefit plans

Question 10

Defined contribution plan

Example of this kind of plan?

Answer 10

Employer agrees to contribute to a pension trust a certain
Sum, each period based on a formula

Ex. 401k plan

Question 11

Defined contribution plan: what 4 possible factors are considered in the formula for contribution

Answer 11

1 age
2 length of employee service
3 employer’s profits
4 compensation level

Question 12

What is the only thing defined in the defined contribution plan?

Answer 12

The amount of the employer’s contribution

Question 13

What factors do the size of the pension benefits depend on? 3

Answer 13

1 amounts contributed

2 income accumulated in trust

3 treatment of forfeitures of funds caused by early
termination of employees

Question 14

Independent 3rd party trustee

Answer 14

Assumes ownership of the pension assets and is

accountable for their investment and distribution

Question 15

Defined benefit plan

Answer 15

Outlines benefits employees will receive when they retire

Question 16

Defined benefit plan: how are benefits determined

Answer 16

As function of employee’s years of service and

compensation level in years approaching retirement

Question 17

Who are the beneficiaries of the defined benefit trust?

2) who are the beneficiaries of the defined contribution trust?

Answer 17

Defined benefit trust: employers are beneficiaries

Defined contribution trust: employees are beneficiaries

Question 18

What is the primary purpose of the defined benefit plan?

Answer 18

Safeguard and invest assets do there will be enough

To pay the employer’s obligation to employees

Question 19

In form the defined benefit trust is a…

Answer 19

Separate entity

Question 20

In substance, the defined trust assets and liabilities…

What does this mean?

Answer 20

Belong to the employer

As long as the plan continues, no matter what happens in
The trust, the employer is responsible for payment of employee
Benefits

Question 21

Actuaries

Answer 21

Individuals trained through rigorous certification program

assign probabilities to future events and their financial effects

Question 22

What do actuaries do relating to pension plans?

Answer 22

Companies hire actuaries to ensure pension plan is

appropriate for the employee group covered

Question 23

Pension obligation

Answer 23

Deferred compensation obligation employer has to

employees under terms of pension plan

Question 24

Vested benefits

Answer 24

Those employee is entitled to receive even if rendering

No additional services to company

Question 25

What do companies use to compute vested benefit obligation?

Answer 25

Vested benefits at current salary levels

Or on years of service

Question 26

Accumulated benefit obligation

Answer 26

Measures vested and no vested benefits based on years

Of service

Question 27

Projected benefit obligation

Answer 27

Pension obligation for vested and nonvested benefits using
Future salaries

Method preferred by FASB

Question 28

How is the projected benefit obligation measured?

Answer 28

Using present value of vested and no vested benefits accrued

To date based on future salary

Question 29

How is overfunded or underfunded status measured on a pension plan?

Answer 29

Difference btw fair value of plan assets and projected

benefit Plan

Question 30

How do companies account for pension cost?

Answer 30

On an accrual basis

Question 31

Service cost AKA projected benefit obligation

Answer 31

Expense caused by increase in pension benefits payable

To employees b/c of their services rendered during the year

Question 32

How do actuaries compute service cost?

Answer 32

Present value of new benefits earned by employees during

Year

Question 33

Interest on liability

Answer 33

Interest expense accrues each year on projected benefit

Just as it does on discounted debt

Question 34

Settlement rate

Answer 34

Interest rate (on liability) computed by actuary

Question 35

Actual return on plan assets

Answer 35

Company adjusts annual pension expense for interest and
Dividends that accumulate within fund

As well as increases and decreases in fair value of assets

Question 36

Amortization of prior service cost

Answer 36

Allocation of prior service cost to pension expense in

Future to remaining service year employees

Question 37

5 components of pension expense

Answer 37

1 service cost for year
2 amortization of prior service cost
3 interest on liability
4 actual return on plan assets
5 gain or loss

Question 38

Interest on liability: discounted basis

Answer 38

Company defers paying liability until maturity

Question 39

Settlement rates

Answer 39

Discount rate that reflects rates at which companies

effectively settle pension benefits

Question 40

How do companies determine settlement rates?

Answer 40

Look at rates of return on high quality fixed income

investments currently available

Question 41

Equation for actual return on plan assets

Answer 41

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