BASIC FEATURES AND TYPES OF PENSION PLANS
Employer (company) Pension Fund Investments Earnings $ $ Fund AssetsDefined Contribution Plan
Defined Benefits Plan
The amounts of the
The amounts of benefits
contributions are known
are known (defined).
(defined).
No promise regarding
The amount of contribution
size of benefits.
needed now to pay benefits
in the future is a computation.
Must account for
A separate legal
the costs of and
and accounting
contributions to
entity. Maintains
the pension plan
a set of books.
COMPONENTS OF PENSION EXPENSE
COMPONENTS OF PENSION EXPENSE
Service Cost + Interest Cost
– Actual Return On Plan Assets Pension Expense xx
+ Amort. Of Unrecognized PSC Cash xx {Company Funding ± Amort. Of Unrecognized Gain (Loss) Prepaid/Accrued Pension Cost xx {Difference
Service Cost
The actuarial present value of benefits earned by employees for the current year of service, measured by the actuary using the benefit formula and
discounted to present value using the assumed discount (settlement) rate.
Interest Cost
The assumed discount rate multiplied by the beginning of year plan obligation measured as the projected benefit obligation. This indicates the increase in plan liabilities during a year due to the passage of time-—in effect, interest expense for the year on an existing liability.
Actual Return On Plan Assets
The actual return on plan assets during the year determined based on the fair value of plan assets. This reduces pension expense—it represents the investment return for the year on assets previously set aside to satisfy plan obligations.
Amortization Of Unrecognized Prior Service Costs
A plan initiation or amendment granting retroactive benefits to employees for services rendered previously results in an immediate increase in the projected benefit obligation and a deferred cost to be amortized. Prior service cost is amortized over the future service-years of employees.
Amortization Of Unrecognized Net Gain Or Loss
EXAMPLE: AMORTIZATION OF UNRECOGNIZED PRIOR
SERVICE COST
The pension plan covers 200 employees and prior service cost is $98,000.
Number of Retirement
Group Employees on Dec. 31
A 20 1998 B 30 1999 C 40 2000 D 60 2001 E 40 2002 F 10 2003 200
Computation of Service-Years
Service-Years Year A B C D E F Total 1998 20 30 40 60 40 10 200 1999 30 40 60 40 10 180 2000 40 60 40 10 150 2001 60 40 10 110 2002 40 10 50 2003 10 10 20 60 120 240 200 60 700 $98,000/700 = $140 per service-year.EXAMPLE: AMORTIZATION OF UNRECOGNIZED
GAINS OR LOSSES
The average remaining service life of all active employees is 5.5 years.
1997 1998 1999
(beginning of the year)
Projected benefit obligation 2,100,000 $2,600,000 $2,900,000 Market-related asset value 2,600,000 2,800,000 2,700,000 Unrecognized net loss –0– 400,000 300,000
Corridor Test and Gain/Loss Amortization Schedule
Minimum Projected Cumulative Amortization
Benefit Plan Unrecognized of Loss Year Obligationa Assetsa Corridorb Net Lossa (For Current Year) 1997 $2,100,000 $2,600,000 $260,000 $–0– $–0– 1998 2,600,000 2,800,000 280,000 400,000 21,818c 1999 2,900,000 2,700,000 290,000 678,182 70,579d aAll as of the beginning of the period.
THE PENSION WORK SHEET
Both sets of records below are treated as one for entering transactions and events. Debits and credits must be equal for each transaction or event.
Zarie Company
Pension Work Sheet—1997
General Journal Entries Memo Record Annual Prepaid/ Projected
Pension Accrued Benefit Plan Items Expense Cash Cost Obligation Assets Balance, Jan. 1, 1997 –0- 100,000 Cr. 100,000 Dr. (a) Service cost 9,000 Dr. 9,000 Cr.
(b) Interest cost 10,000 Dr. 10,000 Cr. (c) Actual return 10,000 Cr. 10,000 Dr. (d) Contributions 8,000 Cr. 8,000 Dr. (e) Benefits 7,000 Dr. 7,000 Cr. Journal entry, 12/31 9,000 Dr. 8,000 Cr. 1,000 Cr.* Balance, Dec. 31, 1997 1,000 Cr.** 112,000 Cr. 111,000 Dr. *$9,000 – $8,000 = $1,000 **$112,000 – $111,000 = $1,000 Net balance = $1,000 Cr. (These two items must be in equal amount $1,000 in this example.
These must be recorded in the regular general journal posted to the formal
general ledger accounts.
Maintains balances for the unrecorded (noncapitalized)
pension items. Entry to record pension expense
Pension Expense………. 9,000
Cash………. 8,000 Prepaid/Accrued Pension Cost……… 1,000
