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Chapter 20: Question 27Q (page 1161)

Why didn’t the FASB cover both types of post-retirement benefits—pensions and healthcare—in the earlier pension accounting rules?

Short Answer

Expert verified

FASB or Financial Accounting Standards Board,incorporated in1973,is an institution that was establishedto monitor the various accounting rulesas defined under theGAAP.

Step by step solution

01

Introduction

The FASB did not cover both types of post-retirement benefits since they differ in various ways. These plans have a different feature that makes them apart from one another.

02

Reasons due to which both pensions and healthcare were not included under the pension accounting rules:

1. Funding: The pension plans of an organization are funded or sponsored by the employer, whereas the employer does not fund healthcare.

2. Benefit:The pension benefits are well-defined under each employee's pension plans; on the other hand, the healthcare benefits vary with the amount.

3. Predictability:The pension plan components are predictable in nature, whereas the healthcare plans are non-predictable because they depend on market conditions.

4. Beneficiary: The beneficiary under the pension plan should be a retired employee, and in the healthcare plan, the beneficiary can appoint a nominee on behalf of the insured person.

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Most popular questions from this chapter

The meaning of the term “fund” depends on the context in which it is used. Explain its meaning when used as a noun. Explain its meaning when it is used as a verb.

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.

For Warren Corporation, year-end plan assets were \(2,000,000. At the beginning of the year, plan assets were \)1,780,000. During the year, contributions to the pension fund were \(120,000, and benefits paid were \)200,000. Compute Warren’s actual return on plan assets.

The following items appear on Brueggen Company’s financial statements. 1. Under the caption Assets: Pension asset/liability. 2. Under the caption Liabilities: Pension asset/liability. 3. Under the caption Stockholders’ Equity: Prior service cost as a component of Accumulated Other Comprehensive Income. 4. On the income statement: Pension expense. Instructions Explain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to \(5,000,000 and the fair value of pension plan assets was \)3,000,000. The market-related asset value was also \(3,000,000. Unrecognized prior service cost was \)2,000,000. On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were \(4,850,000 and \)4,025,000, respectively. The fair value of the pension plan assets amounted to \(4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2017 amounted to \)200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2017. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2017, 2018, and 2019.

(b) Compute pension expense for the year 2017.

(c) Compute the amount of the 2017 increase/decrease in net gains or losses and the amount to be amortized in 2017 and 2018.

(d) Prepare the journal entries required to report the accounting for the company’s pension plan for 2017
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