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IFM10 Ch30 Solutions Manual

IFM10 Ch30 Solutions Manual - Chapter 30 Pension Plan...

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30-1 a. Under a defined benefit plan, the employer agrees to give retirees a specifically defined benefits package. The payments could be set in final form as of the retirement date, or they could be indexed to increase with the cost of living. b. Under a defined contribution plan, companies can agree to make specific payments into a retirement fund, and then have retirees receive benefits from the plan depending on the investment success of the plan. c. Under a profit-sharing plan, the employer makes payments into a retirement fund, but the payments vary with the level of corporate profits. d. The cash balance plan is a new type of retirement plan developed in the late 1990s. It is like a defined benefit plan in some respects and like a defined contribution plan in others. Cash balance plans work like this: An account is created for each employee. The company promises to put a specified percentage of the employee's monthly salary into the plan, and to pay a specified return on the plan's assets, often the T-bill rate. e. An employee's pension rights are said to be vested if they provide a claim on pension fund assets, even if the employee leaves the company prior to retirement. f. Portability refers to a pension plan that an employee can carry from one employer to another. g. A pension plan is fully funded when the present value of expected retirement benefits is equal to the fund's assets on hand. If assets on hand exceed the present value of expected benefits, then the plan is said to be overfunded. If present value of benefits exceeds assets, then the fund is underfunded. h. The actuarial rate of return is the discount rate used to determine the present value of future benefits under the plan. It is also the rate of return at which the fund's assets are assumed to be invested. i. The Employee Retirement Income Security Act (ERISA) of 1974 is the basic federal law governing the administration and structure of corporate pension plans. Answers and Solutions: 30 - 1 Chapter 30 Pension Plan Management ANSWERS TO END-OF-CHAPTER QUESTIONS
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j. The Pension Benefit Guarantee Corporation (PBGC) is a government run insurance system created by the ERISA to ensure that employees of companies which go bankrupt before their plans are fully funded will receive benefits. k. Federal Accounting Standards Board (FASB) Statement 87, "Employers Accounting for Pension Plans," and FASB Statement 35, "Accounting and Reporting by Defined Benefit Plans," provide firms with current guidance for reporting pension costs, assets, and liabilities. For defined contribution plans, FASB rules require the annual contribution to be shown on the income statement, with a note to the financial statements explaining the entry. Conversely, the rules for defined benefit plans require far more complex reporting procedures. In this case, the fund's overall funding status must be reported directly on the balance sheet if the plan is underfunded, and the annual pension expense must be shown on the income statement.
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