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Chapter 20: Question 23Q (page 1161)

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

Short Answer

Expert verified

An underfunded pension planis the type of plan an organization carries in which thevalue of pension liabilityismore than the value of pension assets. Themain reasonfor underfunding is caused due tolosses incurred in investmentsof the firm.

Step by step solution

01

Introduction

Organizations generally combine various amounts that are similar in nature under one head in the balance sheet. In simple words, amounts that require more funds to operate are headed under the column of underfunded, and on the other hand, payments that have excess funds are reported under the head of overfunded.

02

Reporting of the pension plans, some of which are underfunded and some are overfunded

Organizations report the total amount of overfunded or underfunded pension plans under the head of pension asset/liability in the balance sheet.

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Most popular questions from this chapter

Gingrich Importers provides the following pension plan information. Fair value of pension plan assets, January 1, 2017 $2,400,000 Fair value of pension plan assets, December 31, 2017 2,725,000 Contributions to the plan in 2017 280,000 Benefits paid retirees in 2017 350,000 Instructions From the data above, compute the actual return on the plan assets for 2017

Towson Company has experienced tough competition for its talented workforce, leading it to enhance the pension benefits provided to employees. As a result, Towson amended its pension plan on January 1, 2017, and granted past service costs of \(250,000. Current service cost for 2017 is \)52,000. Interest expense is \(18,000, and interest revenue is \)5,000. Actual return on assets in 2017 is \(3,000. What is Towson’s pension expense for 2017? (a) \)65,000. (c) \(317,000. (b) \)302,000. (d) $315,000.

Question: The following defined pension data of Doreen Corp. apply to the year 2017.

Defined benefit obligation, 1/1/17 (before amendment) $560,000

Plan assets, 1/1/17 546,200

Pension asset/liability 13,800 Cr.

On January 1, 2017, Doreen Corp., through plan amendment,

grants past service benefits having a present value of 120,000

Discount rate 9%

Service cost 58,000

Contributions (funding) 65,000

Actual return on plan assets 49,158

Benefits paid to retirees 40,000

Instructions

For 2017, prepare a pension worksheet for Doreen Corp. that shows the journal entry for pension expense and the year-end balances in the related pension accounts.

Lahey Corp. has three defined benefit pension plans as follows. Pension Assets Projected Benefit (at Fair Value) Obligation Plan X \(600,000 \)500,000 Plan Y 900,000 720,000 Plan Z 550,000 700,000 How will Lahey report these multiple plans in its financial statements?

Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year’s financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows. Note J. The company has a defi nedbenefi t pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation’s comparative income statement was \(72,000 in 2017 and \)57,680 in 2016. The following are selected figures from the plan’s funded status and amounts recognized in the Davis Corporation’s Statement of Financial Position at December 31, 2017 (\(000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefits of \)636) \( (870) Projected benefi t obligation \)(1,200) Plan assets at fair value 1,050 Projected benefi t obligation in excess of plan assets $ (150) Given that Davis Corporation’s work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. Instructions (a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements. (b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation. (c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise. (2) Briefly describe how pension gains and losses are recognized.
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