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Unformatted text preview: **Q Q20-2 Q Q20-2 A defined-contribution plan specifies the employer’s contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employer’s profit, or compensation levels. A defined-benefit plan specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits. In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined-benefit plan, the employer’s obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits. Q20-9 The five components of pension expense are: (1) Service cost component —the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. (2) Interest cost component —the increase in the projected benefit obligation as a result of the passage of time. (3) Actual return on plan assets component —the reduction in pension cost for actual investment income from plan assets and the change in the market value of plan assets....
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- Spring '08
- Depreciation, Plan Assets, Dr. Plan Assets