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Chapter 20: Question 23Q (page 1161)

Describe the reporting of pension plans for a company with multiple plans, some of which are underfunded and some of which are overfunded.

Short Answer

Expert verified

An underfunded pension planis the type of plan an organization carries in which thevalue of pension liabilityismore than the value of pension assets. Themain reasonfor underfunding is caused due tolosses incurred in investmentsof the firm.

Step by step solution

01

Introduction

Organizations generally combine various amounts that are similar in nature under one head in the balance sheet. In simple words, amounts that require more funds to operate are headed under the column of underfunded, and on the other hand, payments that have excess funds are reported under the head of overfunded.

02

Reporting of the pension plans, some of which are underfunded and some are overfunded

Organizations report the total amount of overfunded or underfunded pension plans under the head of pension asset/liability in the balance sheet.

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Most popular questions from this chapter

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.

What is service cost, and what is the basis of its measurement?

Name three approaches to measuring benefit obligations from a pension plan and explain how they differ.

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2017. Projected benefit obligation \(4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)600,000 are created. Other data related to the pension plan are: 2017 2018 Service cost \(150,000 \)170,000 Prior service cost amortization –0– 90,000 Contributions (funding) to the plan 200,000 184,658 Benefits paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2017. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2017. (c) Prepare a pension worksheet for 2018 and any journal entries related to the pension plan as of December 31, 2018. (d) Indicate the pension-related amounts reported in the 2018 financial statements.

What is the role of an actuary relative to pension plans? What are actuarial assumptions?
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