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Chapter 20: Q20-25Q (page 1161)

A headline in the Wall Street Journal stated, “Firms Increasingly Tap Their Pension Funds to Use Excess Assets.” What is the accounting issue related to the use of these “excess assets” through plan terminations?

Short Answer

Expert verified

Answer

When pension plans revert to companies, such terminations are considered gains only when a major issue is related to the use of “excess assets” through plan terminations.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Accounting Issues

Accounting issues are obstacles and hurdles that come in the way ofaccounting professionals.Such issues prevent the accountants from performing their roles properly, which leads to inappropriate accounting records.

02

Issue related to the excess assets

The major issue related to excess assets terminations is that a company may recognize it as a gain when such pension plan assets revert to the company.

Another complexity associated with this issue is that when an old plan is eliminated, companies start a new plan. At the same time, some companies believe that theassociated substance does not change, rater there is only a change in the form.

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Most popular questions from this chapter

Hawkins Corporation has the following balances at December 31, 2017. Projected benefit obligation $2,600,000 Plan assets at fair value 2,000,000 Accumulated OCI (PSC) 1,100,000 How should these balances be reported on Hawkins’ balance sheet at December 31, 2017?

In computing the interest component of pension expense, what interest rates may be used?

Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. Increase in this concern resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones. The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.

Instructions

(a) Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?

(b) Differentiate between “accounting for the employer” and “accounting for the pension fund.”

(c) Explain the terms “funded” and “pension liability” as they relate to: (1) The pension fund. (2) The employer.

(d) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.

(e) Distinguish among the following as they relate to pension plans. (1) Service cost. (2) Prior service costs. (3) Vested benefits.

Henning Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the year 2017 in which no benefits were paid. 1. The actuarial present value of future benefits earned by employees for services rendered in 2017 amounted to \(56,000. 2. The company’s funding policy requires a contribution to the pension trustee amounting to \)145,000 for 2017. 3. As of January 1, 2017, the company had a projected benefit obligation of \(900,000, an accumulated benefit obligation of \)800,000, and a debit balance of \(400,000 in accumulated OCI (PSC). The fair value of pension plan assets amounted to \)600,000 at the beginning of the year. The actual and expected return on plan assets was \(54,000. The settlement rate was 9%. No gains or losses occurred in 2017 and no benefits were paid. 4. Amortization of prior service cost was \)50,000 in 2017. Amortization of net gain or loss was not required in 2017. Instructions (a) Determine the amounts of the components of pension expense that should be recognized by the company in 2017. (b) Prepare the journal entry or entries to record pension expense and the employer’s contribution to the pension trustee in 2017. (c) Indicate the amounts that would be reported on the income statement and the balance sheet for the year 2017.

For 2017, Carson Majors Inc. had pension expense of \(77 million and contributed \)55 million to the pension fund. Which of the following is the journal entry that Carson Majors would make to record pension expense and funding? (a) Pension Expense 77,000,000 Pension Asset/Liability 22,000,000 Cash 55,000,000 (b) Pension Expense 77,000,000 Pension Asset/Liability 22,000,000 Cash 99,000,000 (c) Pension Expense 55,000,000 Pension Asset/Liability 22,000,000 Cash 77,000,000 (d) Pension Expense 22,000,000 Pension Asset/Liability 55,000,000 Cash 77,000,000
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