F7/M1 Pension Benefits: Part 1

Question 1

Defined Contribution Plan

Answer 1

401K

- Contribution is defined, Benefit is NOT defined

Question 2

Defined Benefit Plan (SIR AGE)

Answer 2

Defines benefits to be PAID AT retiremen

Question 3

Accumulated Benefit Obligation

Answer 3

PV of Current Salaries

Question 4

Projected Benefit Obligation

Answer 4

PV of Future Salaries

Question 5

Current Service Cost

Answer 5

PV of pension benefits earned by company employees during the current period
- Increases PBO

Question 6

Interest Cost

Answer 6

Beginning PBO
(x)
Discount rate

• Increases PBO over time

Question 7

Prior Service Cost

Answer 7

Increases PBO in the period of plan amendment and is amortized to pension expense over the future service periods of affected employees

Question 8

Actuarial Gains and Losses

Answer 8

Affect PBO

• Gains decrease PBO
• Losses increase PBO

Question 9

** How to calculate PBO **

Answer 9

Beg PBO

(+) Interest cost 
(+) Service cost
(+) Prior service cost amendment
(+/-) Actuarial loss/gain
(-) Benefits paid

Ending PBO

Question 10

** How to calculate ending FV of Plan Assets **

Answer 10

Beg FV of Plan Assets

(+) Contributions
(+) Return on Plan Assets (SQUEEZE)
(-) Benefits paid to retirees

End FV of Plan Assets

Question 11

** Calculate Net Periodic Pension Cost **

SIR AGE

Answer 11

S. Current Service Cost
I. Interest Cost
R. Actual Return on plan assets

A. Amortization of Prior Service Cost
G. & Losses
E. Amortization of Existing Net Obligation at
Implementation

Question 12

AGE –> unamortized is in AOCI

Answer 12

Amortize to Pension Expense

Question 13

JE to record Net Periodic Pension Cost
*******

Answer 13

Dr: Net Periodic Pension Exp. (SIR AGE)
Cr: Pension Benefit Liability - current (SIR)
Cr: OCI (AGE)

Question 14

JE to record cash being put in to pension plan

Answer 14

Dr: Pension Benefit Liability
Cr: Cash

Question 15

SIR is 1 JE, A is 1 JE, G is 1 JE, and E is 1 JE

Answer 15

True

Question 16

R. Return on Plan Assets

Answer 16

Can use actual or expected return on plan assets

• Difference b/w actual and expected return is recognized in OCI and amortized to pension expense over time with actuarial gains or losses

Question 17

The Corridor Approach to amortizing Gains and losses from difference b/w actual and expected gains/losses on plan assets

Answer 17

Unrecognized G/L
< 10% of PBO or FV plan assets> (GREATER)
Excess
/
Avg. remaining service life
=
Amortization

Question 18

E. Amortization of Initial Existing Net Obligation or Net Assets

Answer 18

PBO
< FV Plan Assets>
(=)
Initial Unfunded Obligation
(/)
15 yrs or Avg. employee job life (GREATER)
(=) 
Minimum amortization