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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’s 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’s 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

The following information is available for the pension plan of Radcliffe Company for the year 2017. Actual and expected return on plan assets $ 15,000 Benefits paid to retirees 40,000 Contributions (funding) 90,000 Interest/discount rate 10% Prior service cost amortization 8,000 Projected benefit obligation, January 1, 2017 500,000 Service cost 60,000 Instructions (a) Compute pension expense for the year 2017. (b) Prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2017.

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 “accounting for the employer” and “accounting for the pension fund.”

(c) Explain the terms “funded” and “pension liability” 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.

Mancuso Corporation amended its pension plan on January 1, 2017, and granted $160,000 of prior service costs to its employees. The employees are expected to provide 2,000 service years in the future, with 350 service years in 2017. Compute prior service cost amortization for 2017.

Using the information in E20-2, prepare a pension worksheet inserting January 1, 2017, balances, showing December 31, 2017, balances, and the journal entry recording pension expense.

Linda Berstler Company sponsors a defined benefit pension plan. The corporation’s actuary provides the following information about the plan.

January 1, 2017 December 31, 2017

Defined benefit obligations \(2,500 \)3,300

Plan assets (fair value) 1,700 2,620

Discount rate 10%

Pension asset/liability 800 ?

Service cost for the year 2017 400

Contributions (funding in 2017) 700

Benefits paid in 2017 200

Instructions

(a) Compute the actual return on the plan assets in 2017.

(b) Compute the amount of other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1, 2017, balance was zero.)
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