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Chapter 20: Q5Q. (page 1161)
What is the role of an actuary relative to pension plans? What are actuarial assumptions?
An actuary is a professional in an organization which collects, combines, and analyzes the data that affects an organization's decision. They are also responsible fordetermining the risk level.
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Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year鈥檚 financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows. Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee鈥檚 compensation during the last four years of employment. The company鈥檚 funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefi ts expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation鈥檚 comparative income statement was \(72,000 in 2017 and \)57,680 in 2016. The following are selected figures from the plan鈥檚 funded status and amounts recognized in the Davis Corporation鈥檚 Statement of Financial Position at December 31, 2017 (\(000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefi ts of \)636) \( (870) Projected benefi t obligation \)(1,200) Plan assets at fair value 1,050 Projected benefi t obligation in excess of plan assets $ (150) Given that Davis Corporation鈥檚 work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. Instructions (a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements. (b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation. (c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise. (2) Briefly describe how pension gains and losses are recognized.
Ferreri Company received the following selected information from its pension plan trustee concerning the operation of the company鈥檚 defined benefit pension plan for the year ended December 31, 2017. January 1, December 31, 2017 2017 Projected benefit obligation \(1,500,000 \)1,527,000 Market-related and fair value of plan assets 800,000 1,130,000 Accumulated benefit obligation 1,600,000 1,720,000 Accumulated OCI (G/L)鈥擭et gain 鈥�0鈥� (200,000) The service cost component of pension expense for employee services rendered in the current year amounted to \(77,000 and the amortization of prior service cost was \)120,000. The company鈥檚 actual funding (contributions) of the plan in 2017 amounted to \(250,000. The expected return on plan assets and the actual rate were both 10%; the interest/discount (settlement) rate was 10%. Accumulated other comprehensive income (PSC) had a balance of \)1,200,000 on January 1, 2017. Assume no benefits paid in 2017. Instructions (a) Determine the amounts of the components of pension expense that should be recognized by the company in 2017. (b) Prepare the journal entry to record pension expense and the employer鈥檚 contribution to the pension plan in 2017. (c) Indicate the pension-related amounts that would be reported on the income statement and the balance sheet for Ferreri Company for the year 2017.
Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2016, with the following beginning balances: plan assets \(200,000; projected benefit obligation \)250,000. Other data relating to 3 years鈥� operation of the plan are as follows.
2016 2017 2018 Annual service cost \(16,000 \) 19,000 $ 26,000 Settlement rate and expected rate of return 10% 10% 10% Actual return on plan assets 18,000 22,000 24,000 Annual funding (contributions) 16,000 40,000 48,000 Benefits paid 14,000 16,400 21,000 Prior service cost (plan amended, 1/1/17) 160,000 Amortization of prior service cost 54,400 41,600 Change in actuarial assumptions establishes a December 31, 2018, projected benefi t obligation of: 520,000
Instructions (a) Prepare a pension worksheet presenting all 3 years鈥� pension balances and activities. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) Indicate the pension-related amounts reported in the financial statements for 2018.
The meaning of the term 鈥渇und鈥� depends on the context in which it is used. Explain its meaning when used as a noun. Explain its meaning when it is used as a verb.
What are 鈥渓iability gains and losses,鈥� and how are they accounted for?
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