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Student Notes, Pensions(17)

Defined benefit plans defined benefit plans defined

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obligations or the use of assets)? Defined Benefit Plans Defined Benefit Plans Defined Benefit Plans Defined Benefit Plans
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Chapter 20-7 Service Costs Service Costs Interest on Liability Interest on Liability Expected Return on Plan Assets Expected Return on Plan Assets Amortization of Unamortized Prior Service Amortization of Unamortized Prior Service Costs Costs Amortization of Gains or Losses Amortization of Gains or Losses + + + + +- +- + + +- +- Defined Benefit Plans: components Defined Benefit Plans: components Defined Benefit Plans: components Defined Benefit Plans: components There are 5 Components of Pension Expense: 1. 1. 2. 2. 3. 3. 4. 4. 5. 5.
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Chapter 20-8 Service Costs Service Costs + + Accounting for Pensions Accounting for Pensions Accounting for Pensions Accounting for Pensions Components of Pension Expense 1. 1. Effect on Expense Actuarial present value o f be ne fits  attribute d by the   pe ns io n be ne fit fo rm ula to  e m plo ye e  s e rvic e  during  the   pe rio d.  The  ac tuarial will pro vide  this  info rm atio n to  yo u  (no te  – ac tuarie s  have  s o m e  o f the  hig he s t jo b  s atis fac tio n and it pays  a who le  lo t).
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Chapter 20-9 Accounting for Pensions Accounting for Pensions Accounting for Pensions Accounting for Pensions S e rvic e  c o s t = PV(e xpe c te d be ne fits ) Expe c te d be ne fits  = PVA (be ne fit pe rc e ntag e  x e xpe c te d  s alary at re tire m e nt) Fo r e xam ple : s uppo s e  yo u g e t 1%  pe r ye ar o f yo ur  s alary in be ne fits .  Yo u are  e xpe c te d to  wo rk fo r 20 m o re   ye ars , re tire , live  10 m o re  and the n die .  The  s e ttle m e nt  rate  is  5% , and e xpe c te d s alary at re tire m e nt is   $150,000.  What is  the  s e rvic e  c o s t fo r the  ye ar? Components of Pension Expense
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Chapter 20-10 Accounting for Pensions Accounting for Pensions Accounting for Pensions Accounting for Pensions Components of Pension Expense Effect on Expense Inte re s t fo r the  pe rio d o n the   projected benefit obligation  o uts tanding  during  the  pe rio d (s inc e  the   o blig atio n is  value d at the  pre s e nt value  o f the  future   c o s ts ). The  inte re s t rate  ( settlement rate ) s ho uld re fle c t the   rate  at whic h c o m panie s  c an e ffe c tive ly s e ttle  pe ns io n  be ne fits . Interest on Liability Interest on Liability + + 2. 2.
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Chapter 20-11 Accounting for Pensions Accounting for Pensions Accounting for Pensions Accounting for Pensions Components of Pension Expense Effect on Expense The   expected return  (no te  that this  is  no t the  ac tual  re turn) o n plan as s e ts  is  the  inc re as e  in pe ns io n funds   fro m  inte re s t, divide nds , and re alize d and unre alize d  c hang e s  in the  fair-m arke t value  o f the  plan as s e ts .   Expected Return on Plan Assets Expected Return on Plan Assets 3.
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