Pension Principles, Reporting

Question 1

What are the two types of pension plans?

Answer 1

1. ) Defined Contribution Plan - Amount of employer contribution is defined by contract
2. ) Defined Benefit Plan - The benefits paid during retirement are based on a formula and therefore are defined

Question 2

Define “projected benefit obligation (PBO)”

Answer 2

Obligation for defined benefit plans; present value of unpaid benefits as of the balance sheet date

Question 3

Define “pension expense”

Answer 3

The cost to the firm of providing the pension benefits earned during the year

Question 4

At what amount are plan assets reported?

Answer 4

Fair value

Question 5

List the formula for the amount of return used in computing periodic pension expense

Answer 5

Expected return = rate of return X beginning plan assets

This amount reduces pension expense

Question 6

What is the basis of accounting for defined benefit plans?

Answer 6

Accrual is the basis of accounting for these plans.

Question 7

Define “interest cost” as it relates to pension plans, and show the computation

Answer 7

Growth in pension obligation for a period.

=discount rate x (PBO at beginning of the year)

It is a liability that is assumed by the firm and is part of annual pension expense

Question 8

Define “service cost” as it relates to pension plans

Answer 8

Amount of pension expense reported if interest cost and expected return are equal. It is the present value of benefits earned for a period.

Question 9

List the outside entities that provide services for a sponsoring firm’s defined benefit pension plan

Answer 9

Actuary and Trustee

Question 10

What is the pension liability balance for a defined contribution plan?

Answer 10

Amount of required contribution not paid

Question 11

List the two terms for pension plans pertaining to whether employees provide funds for their plan

Answer 11

Plans can be contributory or noncontributory

Question 12

Where should the funded status of a defined benefit pension plan for a company be reported?

Answer 12

Statement of financial position

Question 13

How is Pension Liability Calculated?

Answer 13

Difference between ending PBO and plan assets at the balance sheet date. If PBO exceeds plan assets, then pension liability

Question 14

What is the discount rate in Pension accounting?

Answer 14

The rate used for all actuarial present value pension calculations. The rate at which the pension obligation could be settled and is pegged at the market rate of interest

Question 15

What is the Expected rate of Return in Pension accounting?

Answer 15

Rate used to compute expected rate of return on plan assets.

Question 16

What two amounts must a firm compute each year for Pension Accounting?

Answer 16

1. ) Annual pension expense - PV cost of benefits earned during the year - cont. operations
2. ) Pension Fund Liability - negative = underfunded, positive =overfunded

Question 17

What are the two sources of funding a PBO for Defined Benefit Fund?

Answer 17

1. ) Employer Contribution

2. ) Return on Fund Assets