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Chapter 20: Q2Q. (page 1161)

Differentiate between a defined contribution pension plan and a defined benefit pension plan. Explain how the employer鈥檚 obligation differs between the two types of plans.

Short Answer

Expert verified

A provident pension fund Is the type of account that intakes the money an employer and an employee of an organization contributes towards the pension.

Step by step solution

01

Difference between a defined contribution pension plan and the defined benefit pension plan

Basis

Defined contribution pension plan

Defined benefit pension plan

Meaning

It is a pension plan where the entire amount of an employee's future pension is unknown.

It is a type of pension plan where the total amount of future pension is determined before the employee鈥檚 retirement.

Duration

The duration of the defined contribution pension plans depends on the value that the employee has invested into the pension account and how many years the amount can be fully utilized or eroded.

The duration under the defined benefit pension plan is indefinite.

Examples

Gratuity received, leave encashment salary

Public provident funds

02

Employer’s obligation differs between the two pension plans as

Under the defined contribution pension plan, the employer's primary responsibility is to contribute a certain percentage of money toward the pension plan in each financial year. The benefit gain or benefit loss arising from the contributions made by the employer are borne by the employee or the owner of the pension plan.

On the other hand, in a defined benefit pension plan, the employer must contribute an adequate amount of money to the pension plans to receive sufficient future monetary benefits.

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Most popular questions from this chapter

At the end of the current period, Oxford Ltd. has a defined benefit obligation of \(195,000 and pension plan assets with a fair value of \)110,000. The amount of the vested benefits for the plan is \(105,000. What amount related to its pension plan will be reported on the company鈥檚 statement of financial position? (a) \)5,000. (c) \(85,000. (b) \)90,000. (d) $20,000.

The following defined pension data of Rydell Corp. apply to the year 2017. Projected benefit obligation, 1/1/17 (before amendment) $560,000 Plan assets, 1/1/17 546,200 Pension liability 13,800 On January 1, 2017, Rydell Corp., through plan amendment, grants prior service benefi ts having a present value of 120,000 Settlement rate 9% Service cost 58,000 Contributions (funding) 65,000 Actual (expected) return on plan assets 52,280 Benefits paid to retirees 40,000 Prior service cost amortization for 2017 17,000 Instructions For 2017, prepare a pension worksheet for Rydell Corp. that shows the journal entry for pension expense and the year-end balances in the related pension accounts.

At January 1, 2017, Hennein Company had plan assets of \(280,000 and a projected benefit obligation of the same amount. During 2017, service cost was \)27,500, the settlement rate was 10%, actual and expected return on plan assets were \(25,000, contributions were \)20,000, and benefits paid were $17,500. Prepare a pension worksheet for Hennein Company for 2017.

Determine the meaning of the following terms. (a) Contributory plan. (b) Vested benefits. (c) Retroactive benefits. (d) Years-of-service method.

At the end of the current year, Pociek Co. has prior service cost of $9,150,000. Where should the prior service cost be reported on the balance sheet?
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