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Chapter 20: Question 27Q (page 1161)

Why didn’t the FASB cover both types of post-retirement benefits—pensions and healthcare—in the earlier pension accounting rules?

Short Answer

Expert verified

FASB or Financial Accounting Standards Board,incorporated in1973,is an institution that was establishedto monitor the various accounting rulesas defined under theGAAP.

Step by step solution

01

Introduction

The FASB did not cover both types of post-retirement benefits since they differ in various ways. These plans have a different feature that makes them apart from one another.

02

Reasons due to which both pensions and healthcare were not included under the pension accounting rules:

1. Funding: The pension plans of an organization are funded or sponsored by the employer, whereas the employer does not fund healthcare.

2. Benefit:The pension benefits are well-defined under each employee's pension plans; on the other hand, the healthcare benefits vary with the amount.

3. Predictability:The pension plan components are predictable in nature, whereas the healthcare plans are non-predictable because they depend on market conditions.

4. Beneficiary: The beneficiary under the pension plan should be a retired employee, and in the healthcare plan, the beneficiary can appoint a nominee on behalf of the insured person.

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Most popular questions from this chapter

Boey Company reported net income of \(25,000 in 2018. It had the following amounts related to its pension plan in 2018: Actuarial liability gain \)10,000; Unexpected asset loss $14,000; Accumulated other comprehensive income (G/L) (beginning balance), zero. Determine for 2018 (a) Boey’s other comprehensive income, and (b) comprehensive income.

Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2017 and 2018. 2017 2018 Projected benefi t obligation, January 1 \(600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 \) 59,000 Settlement rate 10% 10% Expected rate of return 10% 10% Actual return on plan assets 36,000 61,000 Amortization of prior service cost 70,000 50,000 Annual contributions 97,000 81,000 Benefits paid retirees 31,500 54,000 Increase in projected benefi t obligation due to changes in actuarial assumptions 87,000 –0– Accumulated benefi t obligation at December 31 721,800 789,000 Average service life of all employees 20 years Vested benefi t obligation at December 31 464,000 Instructions (a) Prepare a pension worksheet presenting both years 2017 and 2018 and accompanying computations and amortization of the loss (2018) using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) For 2018, indicate the pension amounts reported in the financial statements.

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 company’s funding of the pension plan for both years.

Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2016, with the following beginning balances: plan assets \(200,000; projected benefit obligation \)250,000. Other data relating to 3 years’ operation of the plan are as follows.

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

Instructions (a) Prepare a pension worksheet presenting all 3 years’ pension balances and activities. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) Indicate the pension-related amounts reported in the financial statements for 2018.

Latoya Company provides the following selected information related to its defined benefit pension plan for 2017. Pension asset/liability (January 1) \( 25,000 Cr. Accumulated benefit obligation (December 31) 400,000 Actual and expected return on plan assets 10,000 Contributions (funding) in 2017 150,000 Fair value of plan assets (December 31) 800,000 Settlement rate 10% Projected benefit obligation (January 1) 700,000 Service cost 80,000 Instructions (a) Compute pension expense and prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2017. Preparation of a pension worksheet is not required. Benefits paid in 2017 were \)35,000. (b) Indicate the pension-related amounts that would be reported in the company’s income statement and balance sheet for 2017.
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