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Chapter 20: Question 24Q (page 1161)

Determine the meaning of the following terms. (a) Contributory plan. (b) Vested benefits. (c) Retroactive benefits. (d) Years-of-service method.

Short Answer

Expert verified

The accrued benefitis the type of benefit an employeeearns by working in an organizationand taking adefined pension planto secure its lifeafter retirement.

Step by step solution

01

(a) Contributory plan:

A contributory plan is the type of pension plan where the employee of an organization contributes a part of a section of the total pension cost. It leads to an increase in the amount of pension benefits for an employee in the future.

02

(b) Vested benefits:

Vested benefits are those benefits an employee receives that depict the actuarial present value of the pension benefit an organization is obligated to pay in the future.

03

(c) Retroactive benefits:

Retroactive benefits are those initiated under the plan amendment of an organization procured using the pension benefit formula.

04

(d) Years-of-service method:

The years-of-service method is the type of pension plan method. The total pension benefit is calculated by combining the average service life of each employee in an organization up to its retirement.

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Most popular questions from this chapter

If pension expense recognized in a period exceeds the current amount funded by the employer, what kind of account arises, and how should it be reported in the financial statements? If the reverse occurs—that is, current funding by the employer exceeds the amount recognized as pension expense—what kind of account arises, and how should it be reported?

Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2017 and 2018. 2017 2018 Projected benefi t obligation, January 1 \(600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 \) 59,000 Settlement rate 10% 10% Expected rate of return 10% 10% Actual return on plan assets 36,000 61,000 Amortization of prior service cost 70,000 50,000 Annual contributions 97,000 81,000 Benefits paid retirees 31,500 54,000 Increase in projected benefi t obligation due to changes in actuarial assumptions 87,000 –0– Accumulated benefi t obligation at December 31 721,800 789,000 Average service life of all employees 20 years Vested benefi t obligation at December 31 464,000 Instructions (a) Prepare a pension worksheet presenting both years 2017 and 2018 and accompanying computations and amortization of the loss (2018) using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) For 2018, indicate the pension amounts reported in the financial statements.

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.

Using the information in E20-19, prepare a worksheet inserting January 1, 2017, balances, and showing December 31, 2017, balances. Prepare the journal entry recording postretirement benefit expense.

Hiatt Toothpaste Company initiates a defined benefit pension plan for its 50 employees on January 1, 2017. The insurance company which administers the pension plan provided the following selected information for the years 2017, 2018, and 2019

For Year Ended December 31, 2017 2018 2019 Plan assets (fair value) \(50,000 \) 85,000 \(180,000 Accumulated benefi t obligation 45,000 165,000 292,000 Projected benefi t obligation 60,000 200,000 324,000 Net (gain) loss (for purposes of corridor calculation) –0– 78,400 81,033 Employer’s funding contribution (made at end of year) 50,000 60,000 105,000

There were no balances as of January 1, 2017, when the plan was initiated. The actual and expected return on plan assets was 10% over the 3-year period, but the settlement rate used to discount the company’s pension obligation was 13% in 2017, 11% in 2018, and 8% in 2019. The service cost component of net periodic pension expense amounted to the following: 2017, \)60,000; 2018, \(85,000; and 2019, \)119,000. The average remaining service life per employee is 12 years. No benefits were paid in 2017, \(30,000 of benefits were paid in 2018, and \)18,500 of benefits were paid in 2019 (all benefits paid at end of year). Instructions (Round to the nearest dollar.) (a) Calculate the amount of net periodic pension expense that the company would recognize in 2017, 2018, and 2019. (b) Prepare the journal entries to record net periodic pension expense, employer’s funding contribution, and related pension amounts for the years 2017, 2018, and 2019
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