Chapter 20: Accounting for Pensions

Question 1

Types of pension plans

Answer 1

• nature of pension plans
• defined contribution plan
• defined benefit plan

Question 2

• provide income to employees during their retirement years
• the employer sponsors the plan, incurs the cost, and makes contributions
• the plan (a separate legal and accounting entity) receives contributions, administers plan assets, and makes benefit payments

Answer 2

nature of pension plans

Question 3

• promises a fixed annual contribution to a pension fund
• employee chooses where to invest the fund
• employer’s only obligation is to remit an annual contribution
• employer records pension expense equal to the cash contribution

Answer 3

defined contribution plans

Question 4

• promises a fixed level of retirement benefits derived using a pension formula
• employer is responsible for adequate funding to the plan
• a typical pension formula calculates annual retirement benefits based on years of service, age, and annual pay at retirement

Answer 4

defined benefit plan

Question 5

What are 2 types of defined contribution plans?

Answer 5

• 401K

- Profit Sharing

Question 6

He does the employer record pension expenses equal to cash?

Answer 6

Dr. Pension Plan

Cr. Cash

Question 7

What is the formula to calculate the defined benefit plan?

Answer 7

1.5 x years of service x salary

Question 8

What are the components of defined benefit pension plans?

Answer 8

• pension benefit obligation
• plan assets
• pension expense

Question 9

Pension benefit obligations is future compensation obligation that is recorded…

Answer 9

only in the footnotes

Question 10

What are the components of Pension Benefit Obligation (PBO)?

Answer 10

• service cost
• interest cost
• prior service cost
• loss (gain) on PBO
• retiree benefit paid

Question 11

Increase attributable to another year of service

Answer 11

service cost

Question 12

interest is accrued due to the passage of time

Answer 12

interest cost

Question 13

plan amendment retroactive

Answer 13

prior service cost

Question 14

due to change in actuarial assumptions

Answer 14

loss (gain) on PBO

Question 15

What are the measurements of Pension Benefit Obligation?

Answer 15

• accumulated benefit obligation (ABO)
• vested benefit obligation (VBO)
• projected benefit obligation (PBO)

Question 16

PV of retirement benefits using EXISTING compensation levels.

Answer 16

accumulated benefit obligation

Question 17

vested portion of ABO

Answer 17

vested benefit obligation

Question 18

PV of retirement benefits using PROJECTED compensation levels

Answer 18

projected benefit obligation

Question 19

Pension plan assets are recorded….

Answer 19

only in the footnotes

Question 20

• the resources used to fund the obligation
• a trustee manages the assets of the plan
• the plan assets can change

Answer 20

pension plan assets

Question 21

A trustee manages the assets of the plan by performing the following…

Answer 21

• accepts employer contributions
• invests the contributions
• accumulates the earnings on the investments
• pays benefits from the plan assets to retire employees or their beneficiaries

Question 22

The plan assets can change due to…

Answer 22

• actual return: interest, dividends, gains/losses
• employee contributions
• benefits paid

Question 23

Pension expense is recorded…

Answer 23

on the income statement

Question 24

The employers cost of having the plan.

Answer 24

pension expense

Question 25

What are the components of pension expense?

Answer 25

• service cost
• interest cost
• return of plan assets
• amortization of prior service cost
• amortization of EXCESS net gain/losses

Question 26

How is the service cost calculated?

Answer 26

1.5 x service years x salary

Question 27

How is the interest cost calculated?

Answer 27

beginning PBO x Discount rate

Question 28

• Positive return decreases expense
• negative return increases expense
• the expected return is used to calculate pension expense (income smoothing) (Beginning plan assets x expected return)

Answer 28

return on pension assets

Question 29

• Cost of making plan amendments retroactive to prior years

- amortized over average remaining service life of active employees

Answer 29

amortization of prior service cost

Question 30

• gains and losses occur when actuarial estimates change (liability) or when actual return on assets varies from expected return (asset)
• excess = cumulative gain/loss - 10% corridor
• excess gain/loss is amortized over average remaining service life
• amortize a gain: decreases expenses
• amortize a loss: increases expensed

Answer 30

amortization of EXCESS Net Gains/Losses

Question 31

• funded status of the plan
• recording the periodic expense and funding of the plan
• recording gains and losses

Answer 31

reporting issues

Question 32

The funding status of a plan must be recorded…

Answer 32

on the employer’s balance sheet

Question 33

In the funding status of plan, when PBO is greater than assets it results in a net pension liability, this is called…

Answer 33

underfunded plan

Question 34

In the funding status of a plan, when PBO is less than assets it results in a net pension asset, this is called…

Answer 34

overfunded plan