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Chapter 11: Problem 20

In a recent year's financial statements, Procter \& Gamble Co. showed an unfunded pension liability of \(\$ 1,032\) million and a periodic pension cost of \(\$ 151\) million. Explain the meaning of the \(\$ 1,032\) million unfunded pension liability and the \(\$ 151\) million periodic pension cost.

Short Answer

Expert verified
The $1,032 million is the shortfall between pension obligations and assets. The $151 million is the annual expense of maintaining the pension plan.

Step by step solution

01

Understanding Unfunded Pension Liability

The unfunded pension liability refers to the amount by which Procter & Gamble Co.'s pension obligations exceed the assets set aside to cover those obligations. Specifically, the company should have set aside $1,032 million more than what is currently reserved to meet future pension liabilities. This indicates a shortfall in the pension fund compared to what is needed to fulfill future retirement benefits promised to employees.
02

Understanding Periodic Pension Cost

The periodic pension cost, in this context $151 million, represents the expense that Procter & Gamble Co. recognizes over a year related to its pension plan. This cost includes the service cost for employee benefits earned during the year, interest on the unfunded pension obligation, and expected return on plan assets, among other components. It reflects the annual accounting expense required to properly account for and manage the pension plan.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Unfunded Pension Liability
Unfunded pension liability occurs when a company has promised certain retirement benefits to its employees, but hasn't set aside enough assets to cover these promises. To picture this, imagine a friend promises to repay you a certain sum in the future, but doesn't save enough money in time to do so. Similarly, in Procter & Gamble Co.'s case, they have an unfunded pension liability of $1,032 million. This means their pension commitments surpass the available assets by this amount.
  • The $1,032 million is essentially a gap that they need to fill to meet future pension obligations.
  • This gap indicates potential financial vulnerability as it reflects the company's responsibility towards its employees' future benefits.
By addressing this gap, companies work to ensure that they have enough resources to honor their promises of retirement benefits.
Periodic Pension Cost
Periodic pension cost is the annual accounting expense a company recognizes in relation to its pension plan. For Procter & Gamble Co., this was $151 million in the given year. Think of it as the 'minimum payment' a company needs to make to manage the pension promise to its employees for that year. There are several components involved in calculating this cost:
  • **Service Cost**: The increase in retirement benefits earned by employees during the year.
  • **Interest Cost**: The interest on the existing pension obligation, akin to interest accumulating on a loan over time.
  • **Return on Plan Assets**: The expected earnings from the investments held to fund the pension.
This cost allows companies to systematically recognize pension-related expenses and assure financial balance over time.
Pension Obligations
A pension obligation is essentially a promise made by a company to its employees regarding retirement benefits. It's like a long-term IOU to all the hardworking employees for their future financial security post-retirement. Companies promise to pay these benefits based upon certain rules, as agreed upon in the pension plan. Key points to understand:
  • Pension obligations are shaped by factors like employee tenure, salary levels, and life expectancy.
  • They must be carefully managed to ensure that funds will be available, indicating good financial planning.
  • Both 鈥榗urrent鈥� and 鈥榝uture鈥� obligations play a crucial role in defining the total pension liability that appears on financial statements.
Proper management of these obligations ensures peace of mind for employees relying on them for future financial support.

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Most popular questions from this chapter

Keepsake Photos Inc. operates a chain of photography stores. The company maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Boston Funds, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is \(\$ 315,000\) for the quarter ended December 31 , journalize entries to record (a) the accrued pension liability on December 31 and (b) the payment to the funding agent on January \(15 .\)

An employee earns \(\$ 18\) per hour and \(1^{1 / 2}\) times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 50 hours during the week, and that the gross pay prior to the current week totaled \(\$ 38,540\). Assume further that the social security tax rate was \(6.0 \%\) (on earnings up to \(\$ 100,000\) ), the Medicare tax rate was \(1.5 \%\), and federal income tax to be withheld was \(\$ 185\). a. Determine the gross pay for the week. b. Determine the net pay for the week.

A business issued a 60 -day, \(5 \%\) note for \(\$ 9,000\) to a creditor on account. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest.

The fiscal year for Tip Top Stores Inc. ends on June 30 . In addition, the company computes and reports payroll taxes on a fiscal-year basis. Thus, it applies social security and FUTA maximum earnings limitations to the fiscal- year payroll. What is wrong with these procedures for accounting for payroll taxes?

Opry Sounds is a retail store specializing in the sale of country music. The store employs 3 full-time and 10 part-time workers. The store's weekly payroll averages \(\$ 2,200\) for all 13 workers. Opry Sounds uses a personal computer to assist in preparing paychecks. Each week, the store's accountant collects employee time cards and enters the hours worked into the payroll program. The payroll program calculates each employee's pay and prints a paycheck. The accountant uses a check-signing machine to sign the paychecks. Next, the store's owner authorizes the transfer of funds from the store's regular bank account to the payroll account. For the week of May 10 , the accountant accidentally recorded 400 hours worked instead of 40 hours for one of the full-time employees. 1\. Does Opry Sounds have internal controls in place to catch this error? If so, how will this error be detected?
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