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Acct 302 > Ch 20 > Flashcards

Ch 20 Flashcards

1
Q

What is a pension plan?

A

Is an arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years

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2
Q

Pension accounting may be divided and separately treated as?

A

Accounting for employer

And

Accounting for pension fund

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3
Q

Who is sponsoring the pension plan?

A

Company or employer

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4
Q

Some pension plans are contributory which means the employees bear what?

A

Part of the cost of stated benefits or voluntarily make payments to increase their benefits

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5
Q

Plans that are not contributory mean what for the employer?

A

They bear the entire cost

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6
Q

Qualified pension plans offer what?

A

Tax benefits

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7
Q

Pension funds should be what? A

A

Separate legal and accounting entity

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8
Q

What is a defined contribution plan?

A

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

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9
Q

The formula of a defined contribution plan includes what factors?

A

Age

Length of employee service

Employers profits

Compensation level

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10
Q

Defined contribution plan defined whose contribution?

A

Employer

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11
Q

What is a common defined contribution plan?

A

401k plans

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12
Q

Size of pension benefits that the employee collects under defined contribution plan depends on what factors?

A

Amt originally contributed to pension trust

The income accumulated in trust

The treatment of forfeitures of funds caused by early terminations of other employees

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13
Q

The trustee acting on the behalf of beneficiaries (participating employees assume ownership of what?

A

Pension assets and is accountable for their investment &a distribution

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14
Q

The accounting of a defined contribution plan is straightforward
True or false

A

True

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15
Q

When does an employer report a liability on the balance sheet for a defined contribution plan?

A

Only if it does not make a contribution in full

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16
Q

When does an employer report an asset in a defined contribution plan?

A

Only if it contributes more than required amount

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17
Q

What is the employers annual cost (pension expense) of the defined contribution plan?

A

It is the amount that is obligated to contribute to pension trust

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18
Q

What is a defined benefit plan?

A

Outlines the benefits that employees will receive when they retire

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19
Q

What are the benefits of the defined benefit plan?

A

Function of employees year of service

And of

Compensation level in the years approaching retirement

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20
Q

Who are the beneficiaries in defined contribution plan?

A

Employees

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21
Q

Who are the beneficiaries in the defined benefit plan?

A

Employer

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22
Q

Under a defined benefit plan, what is the trusts primary purpose?

A

To safeguard and invest assets so that there will be enough to pay the employers obligation to employees

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23
Q

Is a defined benefit plan a separate entity?

A

Yes

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24
Q

As long as the defined benefit plan continues what happens to the employer?

A

The employer is responsible for the payment of the defined benefits (without regard to what happens in trust).

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25
Q

What does an employer have to make up in the defined benefit plan?

A

The shortfalls in accumulated asset held by trust

26
Q

What can a employer do in a benefit defined plan?

A

Can recapture any excess accumulated in the trust either through reduced future findings or through reversion of funds

27
Q

Why are employers at risk with defined benefit plans?

A

Bc they must contribute enough to meet the cost of benefits that he plan defines

28
Q

What is a pension obligation?

A

It is the deferred compensation obligation it has to its employees for their service under the terms of pension plan

29
Q

One way to measure pension obligation is to base it only on benefits vested on employees, using vested benefits.

What is vested benefits?

A

Are those that the employee is entitled to receive even if he or she renders no additional services to the company.

30
Q

In order to achieve vested benefit status, what must happen?

A

A certain number of years of service to the employer is required by the employee

31
Q

How is vested benefit obligation computed?

A

Uses only vested benefits at current salary levels

32
Q

A second way to measure obligation is accumulated benefit obligation.

What is accumulated benefit obligation?

A

The company computes deferred compensation amount on all years of employees service both vested and non vested using current salary levels

33
Q

A third measure of obligation is projected benefit obligation.

What is projected benefit obligation?

A

Bases deferred compensation amount on both vested and non vested service using future salaries

34
Q

What is the largest measurement of pension obligation and why?

A

Projected benefit obligation because future salaries are expected to be higher than current salaries

35
Q

Which of the alternative measures of pension liability does profession favor?

A

Projected benefit obligation which is the present balance of vested and non vested benefits accrued to date based on employees future salary levels

36
Q

Overfunded and underfunded status is measured how?

A

Difference between fair value of plan assets and projected benefit obligation

37
Q

What are the components of pension expense?

A
  1. Service cost
  2. Interest in liability
  3. Actual return on plant assets
  4. Amortization of prior service cost
  5. Gain or loss
38
Q

What is a service cost?

A
  • Is the expense caused by the increase in pension benefits payable (projected benefit obligation) to employees bc of their services rendered during current yr
  • Actuarial PV of benefits attributed by pension benefit formula to employee service during period
39
Q

Under service cost, the actuary predicts what?

A

Additional benefits an employer must pay under plans benefit formula as a result of employees current years service and discounts the cost of future benefits back to PV

40
Q

For service cost, benefits years of service actuarial method is used to determine what

A

Pension expense based on future salary levels

42
Q

FASB indicated projected benefit obligation should be used as the basis for determining what?

A

Service cost

44
Q

What is the interest component of interest on liability?

A

It is the interest for the period on PBO outstanding during the period

45
Q

What should be used to compute interest on liability?

A

Simple interest computation and applying it to beg of yr balance of PBL

46
Q

For the interest on liability, the rates should reflect what?

A

At which companies can effectively settle pension benefits.

47
Q

Actuaries compute service cost as what?

A

PV of new benefits earned by employees during the yr

48
Q

Pension plan assets include what?

A

Investment in stocks, bonds, other securities and real estate that a company holds to earn reasonable return generally at minimum risk

49
Q

The higher the actual return on pension plan assets, what happens with the employer?

A

The less the employer has to contribute eventually and therefore the less pension expense that it needs to report

50
Q

Actual return on plan assets is what?

A

The difference between fair value of plan assets at the beginning of period and at the end of period adjusted for contributions and benefit payments

52
Q

What is interest on the liability?

A
  • Pension liability is recorded on a discounted basis bc the company defers paying liability until maturity. Then liability accrued interest over life of employee
  • interest expense accrues each year on projected benefit obligation just as it does on any discounted debt
  • Actuary helps to select interest rate which is known as settlement rate
54
Q

What is the formula for pension asset/liability?

A

Difference between PBO and fair value of plan assets which is reported on B/S

55
Q

When PBO > plan assets

What occurs?

A

Pension liability

56
Q

What occurs when

PBO < plan assets

A

Pension asset occurs

57
Q

The retroactive benefits provided from prior service cost (PSC) should not be recognized when

A

Should not recognize as pension expense in the year of amendment

58
Q

In prior service cost (PSC), the PSC is recorded as?

A

As an adjustment to other comprehensive income.

59
Q

After making an adjustment to other comprehensive income for prior service cost, what then happens?

A

The employer then recognizes the prior service cost as an component of pension expense over the remaking service lives of the employees who are expected to benefit from change in plan

60
Q

The increase in pension funds from interest, dividends and realized and unrealized charges in fair value of the plan assets is what?

A

Actual return on plan assets

63
Q

What is actual return on plan assets?

A

The return earned by accumulated pension fund assets in a particular yr is relevant to measuring net cost to employer of sponsoring employee pension plan

So the company should adjust annual pension expense for interest and dividends that accumulate within the fund as well as increases and decrease in the fair value of fund assets

67
Q

What is amortization of prior service cost?

A

There is an allocation of cost (prior service cost) of providing retroactive benefits to pension expense in the future specifically to the remaining service years of affected employees

68
Q

What is a gain or loss?

A

Volatility in pension expense can result from sudden and large changes in fair value of plan assets (resulting differences between actual return and expected return on plan assets) and by changes in PBO

69
Q

The cost of retroactive benefits affects the projected benefit obligation at date of amendment how?

A

It increases PBO

70
Q

What reduces volatility associating with pension expense?

A

Smoothing technique

71
Q

Unexpected swings in pension expense can result from

A
  1. Large changes in fair value of plan assets

2. Changes in actuarial assumption that affect the amount of PBO

Acct 302 (7 decks)

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