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Chapter 20: Q4IFRS (page 1192)
Question: Bill Haley is learning about pension accounting. He is convinced that in years when companies record liability gains and losses, total comprehensive income will not be affected. Is Bill correct? Explain.
Answer
According to the stated situation, the assumption ofBill is not correct.
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Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. Increase in this concern resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones. The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.
Instructions
(a) Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?
(b) Differentiate between 鈥渁ccounting for the employer鈥� and 鈥渁ccounting for the pension fund.鈥�
(c) Explain the terms 鈥渇unded鈥� and 鈥減ension liability鈥� as they relate to: (1) The pension fund. (2) The employer.
(d) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.
(e) Distinguish among the following as they relate to pension plans. (1) Service cost. (2) Prior service costs. (3) Vested benefits.
In examining the costs of pension plans, Helen Kaufman, CPA, encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans. Instructions (a) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs. (b) Explain the following terms as they apply to accounting for pension plans. (1) Market-related asset value. (2) Projected benefit obligation. (3) Corridor approach. (c) What information should be disclosed about a company鈥檚 pension plans in its financial statements and its notes?
Kenseth Corp. has the following beginning-of-the-year present values for its projected benefit obligation and market-related values for its pension plan assets. Projected Plan Benefit Assets Obligation Value 2016 \(2,000,000 \)1,900,000 2017 2,400,000 2,500,000 2018 2,950,000 2,600,000 2019 3,600,000 3,000,000 The average remaining service life per employee in 2016 and 2017 is 10 years and in 2018 and 2019 is 12 years. The net gain or loss that occurred during each year is as follows: 2016, \(280,000 loss; 2017, \)90,000 loss; 2018, \(11,000 loss; and 2019, \)25,000 gain. (In working the solution, the gains and losses must be aggregated to arrive at year-end balances.) Instructions Using the corridor approach, compute the amount of net gain or loss amortized and charged to pension expense in each of the four years, setting up an appropriate schedule.
For 2017, Carson Majors Inc. had pension expense of \(77 million and contributed \)55 million to the pension fund. Which of the following is the journal entry that Carson Majors would make to record pension expense and funding? (a) Pension Expense 77,000,000 Pension Asset/Liability 22,000,000 Cash 55,000,000 (b) Pension Expense 77,000,000 Pension Asset/Liability 22,000,000 Cash 99,000,000 (c) Pension Expense 55,000,000 Pension Asset/Liability 22,000,000 Cash 77,000,000 (d) Pension Expense 22,000,000 Pension Asset/Liability 55,000,000 Cash 77,000,000
What is the role of an actuary relative to pension plans? What are actuarial assumptions?
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