W5 - Morgan-2 - Chapter 20: Question # 2 Differences...

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Chapter 20: Question # 2 Differences between a defined contribution pension plan and a defined benefit pension plan. Explain how the e m between the two types of plans. The employer's obligation under the defined contribution plan is to provide a fixed contribution (or a fixed pe r retirement accounts. Defined contribution plans, usually, require employees to make a small contribution and than a minimum contribution. Employees are also, given the option of investing these contributions. The bene f is that employees will receive the value of the account at which time they decide to retire. There are no adjustm health benefits included in most defined contribution plans, although, (usually) employees have the option of p u time of retirement. The employer's obligation under the defined benefit plan is to provide employees a benefit, which is based on a account the age of employees at retirement, the number of years employees have worked under the plan, and f a highest salary before retirement. Defined benefit plans include adjustments for the cost of living, health benef i benefit plans are funded either by a fixed percentage of salary or an actuarially determined variable rate. Def i n employees to contribute a fixed percentage of salary. The contributions are combined and held in a large inve s m distribute benefits to retired employees. Chapter 20: Question # 10 Identify thw five components that comprise pensions expense. Briefly explain the nature of each component. The five components which comprise pension expense are as follows: 1. Service cost 2. Interest on the projected benefit obligation 3. Expected return on plan assets 4. Amortization of prior service cost; and 5. Effects of gains and losses The following are brief explanations of these five components. period. Service cost, basically, is an increase in pension benefits payable to employeyees, in relation to serv accounting period. Levels of future salaries need to be considered when calculating service cost. The amou n the assumptions decided in estimating the increases in future pension benefits (for example, turnovers, ear and increases in salaries). Adjustments of these assumptions can greatly affect the valuation of service cos t A liability occurs because pension plans are a deferred compensation arrangement. Since the liability is no are distributed (at retirement), the liability is recorded as a discounted account. The rate of the discount is b on high-quality investments or an implicit rate of return (of retirement annuities). During each year the ob
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This note was uploaded on 04/09/2010 for the course ACC 423 acc 423 taught by Professor Mr.youknowwho during the Spring '10 term at University of Phoenix.

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W5 - Morgan-2 - Chapter 20: Question # 2 Differences...

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