Chapter 20 (ACCT-311) - CHAPTER REVIEW 1 Chapter 20...

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CHAPTER REVIEW 1. Chapter 20 discusses the various aspects of accounting for the cost of pension plans. Accounting for pension costs is somewhat complicated because of the variety of social concepts, legal considerations, actuarial techniques, income tax regulations, and varying business philosophies that affect the development and maintenance of pension plans. This chapter relates these issues to the recommended accounting treatment for the costs associated with a pension plan. Nature of Pension Plans 2. (S.O. 1) A pension plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working. In the accounting for a pension plan, consideration must be given to accounting for the employer and accounting for the pension plan itself. A pension plan is said to be funded when the employer sets funds aside for future pension benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund and for making payment to the recipients as the benefits come due. In an insured plan, the funding agency is an insurance company; in a trust fund plan, the funding agency is a trustee. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 3. Pension plans can be contributory or noncontributory. In a contributory plan, the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits. If the plan is noncontributory, the employer bears the entire cost. Because the problems associated with pension plans involve complicated actuarial considerations, actuaries are engaged to ensure that the plan is appropriate for all employee groups covered. Actuaries make predictions (actuarial assumptions) of mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and other factors necessary to operate a pension plan. Thus, accounting for defined benefit pension plans is highly reliant upon information and measurements provided by actuaries. Types of Pension Plans 4. (S.O. 2) The most common types of pension arrangements are defined contribution plans and defined benefit plans. In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. The formula might consider such factors as age, length of service, employer’s profits, and compensation level. The accounting for a defined contribution plan is straightforward. The employer’s responsibility is simply to make a contribution each year based on the formula established in the plan. Thus, the employer’s annual cost is the amount it is obligated to contribute to the pension
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trust. If the contribution is made in full each year no pension asset or liability is reported on the balance sheet.
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5. A defined benefit plan defines the benefits that the employee will receive at the time of retirement. The formula that is typically used provides for the benefits to be a function of
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This note was uploaded on 10/03/2010 for the course ACCT Acct taught by Professor Straus during the Spring '10 term at University of Maryland Eastern Shore.

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Chapter 20 (ACCT-311) - CHAPTER REVIEW 1 Chapter 20...

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