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Name three approaches to measuring benefit obligations from a pension plan and explain how they differ.

Short Answer

Expert verified

Wind-up is a term used when an organization terminates the pension plan contract of an employee. The main reason for wind-up is due to bankruptcy of the firm.

Step by step solution

01

The three approaches that are responsible for measuring the benefit obligations are

  1. Vested benefit obligation
  2. Accumulated benefit obligation
  3. Defined benefit obligation
02

Difference between the approaches

Vested benefit obligation

Accumulated benefit obligation

Defined benefit obligation

This type of measure considers the current salary levels and the vested benefits of an employee.

This benefit obligation calculates the total present value of the pension benefits before the retirement of an employee using the pension benefit formula.

This type of benefit obligation combines vested and non-vested services requiring the employee's future salaries.

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Most popular questions from this chapter

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2017. Projected benefit obligation \(4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)600,000 are created. Other data related to the pension plan are: 2017 2018 Service cost \(150,000 \)170,000 Prior service cost amortization โ€“0โ€“ 90,000 Contributions (funding) to the plan 200,000 184,658 Benefits paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2017. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2017. (c) Prepare a pension worksheet for 2018 and any journal entries related to the pension plan as of December 31, 2018. (d) Indicate the pension-related amounts reported in the 2018 financial statements.

The following items appear on Brueggen Companyโ€™s financial statements. 1. Under the caption Assets: Pension asset/liability. 2. Under the caption Liabilities: Pension asset/liability. 3. Under the caption Stockholdersโ€™ Equity: Prior service cost as a component of Accumulated Other Comprehensive Income. 4. On the income statement: Pension expense. Instructions Explain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)

Andrews Company has five employees participating in its defined benefit pension plan. Expected years of future service for these employees at the beginning of 2017 are as follows. Future Employee Years of Service Jim 3 Paul 4 Nancy 5 Dave 6 Kathy 6 On January 1, 2017, the company amended its pension plan, increasing its projected benefit obligation by $72,000. Instructions Compute the amount of prior service cost amortization for the years 2017 through 2022 using the years-of-service method, setting up appropriate schedules.

Elton Co. has the following postretirement benefit plan balances on January 1, 2017. Accumulated postretirement benefi t obligation \(2,250,000 Fair value of plan assets 2,250,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends the plan so that prior service costs of \)175,000 are created. Other data related to the plan are: 2017 2018 Service costs \( 75,000 \) 85,000 Prior service costs amortization โ€“0โ€“ 12,000 Contributions (funding) to the plan 45,000 35,000 Benefits paid 40,000 45,000 Actual return on plan assets 140,000 120,000 Expected rate of return on assets 8% 6% Instructions (a) Prepare a worksheet for the postretirement plan in 2017. (b) Prepare any journal entries related to the postretirement plan that would be needed at December 31, 2017. (c) Prepare a worksheet for 2018 and any journal entries related to the postretirement plan as of December 31, 2018. (d) Indicate the postretirement-benefitโ€“related amounts reported in the 2018 financial statements.

Erickson Company sponsors a defined benefit pension plan. The corporationโ€™s actuary provides the following information about the plan. January 1, December 31, 2017 2017 Vested benefit obligation \(1,500 \)1,900 Accumulated benefit obligation 1,900 2,730 Projected benefit obligation 2,500 3,300 Plan assets (fair value) 1,700 2,620 Settlement rate and expected rate of return 10% Pension asset/liability 800 ? Service cost for the year 2017 400 Contributions (funding in 2017) 700 Benefits paid in 2017 200 Instructions (a) Compute the actual return on the plan assets in 2017. (b) Compute the amount of the other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1, 2017, balance was zero.) (c) Compute the amount of net gain or loss amortization for 2017 (corridor approach). (d) Compute pension expense for 2017.

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