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Identify the five components that comprise pension expense. Briefly explain the nature of each component.

Short Answer

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The pension expense of an organization strictly depends upon its five components.These components are equally responsible for the overall enhancement of the projected defined benefit pension plan.

Step by step solution

01

The five components of the pension expense are

  1. Service cost
  2. Interest cost
  3. Actual return on plan assets
  4. Amortization of past services
  5. Gains and losses
02

Nature of each component

1. Service cost:Service cost measures the present value of pension benefits by using the pension benefit formula for the total number of years of service of an employee during the period of an accounting year.

2. Interest cost:It is calculated by multiplying the amount of projected benefit obligation with its settlement rate that measures the increase in the defined benefit obligation pension plan.

3. Actual return on plan assets:It measures the inevitable decrease in the pension cost for the investment made by an organization towards the pension plans. It is responsible for measuring the variation in the amount of plan value of assets.

4. Amortization of past services:It is a term used to measure the cost of benefits (retroactive) that are acceptable in the pension plan amendment of the organization.

5. Gains and losses:It measures the variation in the amount of defined benefit obligation and the plan assets of the organization. It arises due to the difference in the actual and the expected value of plan assets according to the actuarial assumptions.

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Most popular questions from this chapter

Question: Kramer Co. has prepared the following pension worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2017.

Instructions (a) Determine the missing amounts in the 2017 pension worksheet, indicating whether the amounts are debits or credits. (b) Prepare the journal entry to record 2017 pension expense for Kramer Co. (c) Determine the following for Kramer for 2017: (1) settlement rate used to measure the interest on the liability and (2) expected return on plan assets.

For Warren Corporation, year-end plan assets were \(2,000,000. At the beginning of the year, plan assets were \)1,780,000. During the year, contributions to the pension fund were \(120,000, and benefits paid were \)200,000. Compute Warrenโ€™s actual return on plan assets.

Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2017 and 2018. 2016 2017 2018 Annual service cost \(16,000 \) 19,000 \( 26,000 Settlement rate and expected rate of return 10% 10% 10% Actual return on plan assets 18,000 22,000 24,000 Annual funding (contributions) 16,000 40,000 48,000 Benefits paid 14,000 16,400 21,000 Prior service cost (plan amended, 1/1/17) 160,000 Amortization of prior service cost 54,400 41,600 Change in actuarial assumptions establishes a December 31, 2018, projected benefi t obligation of: 520,000 2017 2018 Plan assets (fair value), December 31 \)699,000 $849,000 Projected benefi t obligation, January 1 700,000 800,000 Pension asset/liability, January 1 140,000 Cr. ? Prior service cost, January 1 250,000 240,000 Service cost 60,000 90,000 Actual and expected return on plan assets 24,000 30,000 Amortization of prior service cost 10,000 12,000 Contributions (funding) 115,000 120,000 Accumulated benefi t obligation, December 31 500,000 550,000 Interest/settlement rate 9% 9% Instructions (a) Compute pension expense for 2017 and 2018. (b) Prepare the journal entries to record the pension expense and the companyโ€™s funding of the pension plan for both years.

Describe the reporting of pension plans for a company with multiple plans, some of which are underfunded and some of which are overfunded.

Describe the accounting for actuarial gains and losses.

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