Acc 302- Chapter 20 Study Guide
Acc 302- Chapter 20 Study Guide Acc 302
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This 2 page Study Guide was uploaded by Nicole Nord on Monday November 16, 2015. The Study Guide belongs to Acc 302 at Ball State University taught by James Schmutte in Fall 2015. Since its upload, it has received 89 views. For similar materials see Intermediate Accounting 2 in Accounting at Ball State University.
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Date Created: 11/16/15
Chapter 20 Study Guide Pension Plans 1 Pension Plan an arrangement whereby an employer provides benefits to retired employees for services provided during their working years When pension plans are funded it means the employer makes payments to a funding agency which in turns invests the money and makes payments to recipients as benefits come due Plans may either be contributory or noncontributory a Contributory in this kind of plan the employee bears part of the cost of the pension plan They may also make voluntary payments b Noncontributory in these plans the employer bears the entire cost and the employee contributes nothing c There is also another type of pension plan that offers tax benefits these plans are called Qualified Pension Plans Defined Contribution Plan When the employer agrees to contribute a defined amount into the pension plan each period This plan only defines the employer s contribution not the expected benefit One example of this kind of plan is a 401k plan a Benefit depends on three factors i The amounts originally contributed into the plan ii The income accumulated in the trust iii The treatment of forfeited funds by early termination of other employees b Accounting for defined contribution The employers annual pension expense is just simply the amount that the employer is obligated to contribute into the pension plan each year Defined benefit plan Outlines the benefits employees will receive when they retire This is the kind of plan that this chapter focuses on most and that will be focused on as a part of our exam The benefits are determined by the employee s years of service and the compensation level near retirement To determine the amount of contribution today we use the time value of money method The expense recognized each period is not necessarily equal to the employer contribution Accounting for Pensions 1 Pension obligation the deferred compensation obligation the employer has to its employees for their service Vested benefits benefits that the employee will receive even if they stop working that day a Vested benefit obligation is calculated by using only the vested benefits at current salary levels 3 Projected benefit obligation This is calculated using projected future salaries to determine projected future benefits this is the most accurate way of accounting for a defined benefit plan FASB s choice 4 Overfunded or Underfunded a This is determined by comparing the fair value of the assets in the pension fund with the expected future obligation If the fair value is greater than the future obligation then the plan is overfunded if the fair value is less than the future obligation then the plan is underfunded 5 Components of pension expense a Service CostIncreases pension expense i The actuarial present value of the benefits attributed by the pension benefit formula to employee service during the period b Interest on the liability Increases pension expense c Actual return on the plan assets Generally will decrease the pension expense i Calculated by Plan assets EB Plan assets BB Contributions Benefits Paid d Amortization of prior service cost This will generally increase the pension expense i Calculated by computing the total number of expected years of service to be worked by all the employees and then divides the accumulated prior service costs by the total number of services years This gives us the cost per service year Finally the company multiplies the number of service years consumed each year by the cost per year to determine the annual amortization charge e Gains and losses can either decrease or increase pension expense 6 There is nothing I can put in this study guide to accurately help you when calculating pension expense but if you go over the in class examples and use the worksheet he provided you should be able to get it down For extra help look on pages 11921203 7 How to calculate an unexpected gain or loss Actual Return Expected Return Unexpected Gain or loss a This unexpected gain or loss is treated as other comprehensive income Homework Problems to Review E20 2 205 207 2010 P20l 202 208
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