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1. **Question**: Which of the following statements about defined contribution pension plans is true?
- A) The employer guarantees a specific retirement benefit to employees.
- B) The retirement benefits are determined by the investment performance of the plan's assets.
- C) The employer contributes a fixed amount each period to the pension plan.
- D) The benefits are calculated based on the employee's salary and years of service.
**Answer**: B) The retirement benefits are determined by the investment performance of the plan's assets.
2. **Question**: How are pension liabilities reported in a company's financial statements?
- A) They are reported as a current liability.
- B) They are reported as an equity item.
- C) They are disclosed in the footnotes to the financial statements.
- D) They are not reported in the financial statements.
**Answer**: C) They are disclosed in the footnotes to the financial statements.
3. **Question**: Which accounting method for pension plans requires recognizing the net pension liability or asset on the balance sheet?
- A) Defined Contribution Method
- B) Defined Benefit Method
- C) Accrual Method
- D) Cash Method
**Answer**: B) Defined Benefit Method
4. **Question**: What is the funding status of a pension plan?
- A) It refers to the total amount of money contributed by employees.
- B) It refers to the total market value of the plan's assets.
- C) It refers to the extent to which the plan's assets exceed or fall short of its pension obligations.
- D) It refers to the tax status of the pension plan.
**Answer**: C) It refers to the extent to which the plan's assets exceed or fall short of its pension obligations.
5. **Question**: Which of the following factors affects the calculation of pension expense under a defined benefit plan?
- A) Expected return on plan assets
- B) Employee contributions
- C) Inflation rate
- D) Market value of plan assets
**Answer**: A) Expected return on plan assets
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Related Questions
Please answer the following questions about defined benefit pension plans:
Companies with defined benefit pension plans must recognize pension expenses each period. What are the five components of pension expense? Briefly describe each component.
How does each component of pension expense affect pension expense during the period (increase, decrease, or uncertain)?
What is the difference between the accumulated pension obligation and the projected pension obligation?
What determines whether a pension plan is underfunded or overfunded?
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1. Which of the following statements typifies defined contribution plans?
Investment risk is borne by the corporation sponsoring the plan.
O Retirement benefit is defined by a pension formula
O The plans are more complex than defined benefit plans.
O The employer's obligation is satisfied by making the periodic contribution to the plan.
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Xerox reports the following pension and retiree health care ("Other") footnote as part of its 10-K report.
Pension Benefits
Retiree Health
2010
2009
2010
2009
(in millions)
Change in Benefit Obligation
Benefit obligation, January 1
$9,194 $8,495 $1,102
$1,002
Service cost
178
173
B
7
Interest cost
575
508
54
60
Plan
participants' contributions
11
9
26
36
Plan amendments
[19)
4
(86)
1
Actuarial loss (in)
477
209
13
124
Aquistions
140
1
1
Currency exchange rate changes
(154)
373
6
15
(1)
Curtailments
Benefits paid/settlements
Benefit obligation, December 31
Change in Plan Assets
Fair value of plan assets, January 1
(670) [578] (118) (143)
$9,731 $9,194 $1,006 $1,102
$7,561 $6,923
$-
$-
Actual return on plan assets
846
720
-
Employer contribution
237
122
92
107
Plan participants' contributions
11
9
26
36
Aquistions
107
-
-
Currency exchange rate changes
(144)
349
Benefits paid/settlements
(669)
15781
(118)
(143)
Other
(9)
16
Fair value of plan assets, December 31
Net funded status at…
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Which of the following factors is least likely to affect the amount of retirement benefits under a defined benefit plan? *
A. The employee's length of service
B. The level of the employee's compensation
C. The age of the retiring employee
D. The amount of employer contributions to a fund.
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A defined benefit plan is one in which:
A.) The employer promises specified payments to employees on their retirement.
B.)The specific provisions are defined by the Internal Revenue Code.
C.) The specific provisions are defined by the Uniform Code of Retirement Plans.
D.) The employee can specify the mix of benefits (e.g., health, pension, insurance) that will be received on retirement.
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What is meant by past service cost? When is past service cost recognized as pension expense?
Differentiate between a defined contribution pension plan and defined benefit pension plan. Explain how the employer’s obligation differs between the two types of plans.
What disclosures should be made by lessees and lessors related to future payments?
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In accounting for a defined-benefit pension plan
__the expense recognized each period is equal to the cash contribution.
___the liability is determined based upon known variables that reflect future salary levels promised to employees.
__the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
__an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
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Indicate by letter whether each of the events listed below increases (I), decreases (D), or has no effect (N) on an employer's periodic pension expense in the year the event occurs.
Events
1. Interest cost. _____
2. Amortization of prior service cost---AOCI. ______
3.Excess of the expected return on plan assets over the actual return _____
4. Expected return on plan assets. _____
5. A plan amendment that increases benefits is made retroactive to prior years. ____
6. Actuary's estimate of the PBO is increased.…
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b. How does each component of pension expense affect pension expense during the period (increase, decrease, or uncertain)?
c. What is the difference between the accumulated pension obligation and the projected pension obligation?
d. What determines whether a pension plan is underfunded or overfunded?
arrow_forward
Which of the following is not a characteristic of a defined-contribution pension plan?
The employer's contribution each period is fixed.
If the employer does not make contribution in full, then it reports a pension liability. If the employer contributes more than the required amount, then it reports a pension asset.
An appropriate funding pattern must be established to ensure that the promised benefits at employees’ retirement will be met.
The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.
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In a defined contribution plan, a formula is used that:
Ensures that pension expense and the cash funding will be different
Requires an employer to contribute a certain sum each period based on the formula
Defines the benefits that the employee will receive at the time of retirement
Ensures that the employer is at risk to make sure funds are available at retirement
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Carson Company sponsors a single-employer defined benefit pension plan. The plan provides that pension benefits are determined by age, years of service, and compensation. Among the components that should be included in the calculation net pension cost are service cost, interest cost, and actual return on plan assets.
Required:
A. What two accounting problems result from the nature of the defined benefit pension plan? Why do those problems arise?
B. How should Carson determine service cost component of the net pension cost?
C. How should Carson determine the interest cost component of the net pension cost?
D. How should Carson determine the actual return on plan assets component of the net pension cost?
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6., RST Company offers a qualified retirement plan. Each employee contributes 4
percent of his or her pretax income to the plan, and RST matches each employee's
contribution. An employee's benefit at retirement is determined by his or her
account balance at the time of retirement. What type of retirement plan does RST
offer?
a. Defined contribution plan.
b. Defined benefit, flat percentage of annual earnings
c. Defined benefit, unit-credit formula.
d. Defined benefit, flat dollar amount for all employees
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In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following are considered by the actuary:
retirement and mortality rate.
interest rates.
benefit provisions of the plan.
all of these factors.
In accounting for a defined-benefit pension plan
an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
the expense recognized each period is equal to the cash contribution.
the liability is determined based upon known variables that reflect future salary levels promised to employees.
Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
Vested benefit obligation
Accumulated benefit obligation
Defined benefit…
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4. . A. What are the main differences in the
management of a defined benefit pension
plan, compared with the management of a
defined contribution pension plan?
B. How does the current age of a current
worker (not a current retiree) impact the cost
to the employer (sponsor) of a defined benefit
pension plan? Explain fully.
C. Some employers offer defined benefit
pension plans, while others offer defined
contribution pension plans. Separately explain
how risk management, both by employer as
well as by employer, plays a role in which
type of plan the employer decides to offer.
D.
Now changing subject, so the question
will not be too short. Identify and explain all
three separate components of a rate of
interest (or of any other required rate of
return). Draw and explain the utility function,
from the beginning of the semester, if
necessary to find any of the three
components.
Е.
Apply all three of the components of a
rate of interest, from part D, to explain how an
insurance company…
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A company currently offers it’s employees a defined benefit pension plan, but is looking into changing to a defined contribution plan for new employees, the company reports under IFRS.
Within the notes, there is reference to the following: in relation to the pension extract (a)• Net pension liabilities/asset
• Employee service cost
• Net interest expense/income• Remeasurements
Explain what the main features are of a defined benefit and defined contribution pension plan and how they are included in the financial statements. With reference to the pension notes, describe each item and how any movement in those items would be recorded in the financial statements.
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If employee's are paying into a SIMPLE retirement plan, each payperiod how is the SIMPLE plan's contributions entered in a journal entry?
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Which type of pension plan would you prefer to be covered under (i.e., defined benefit, defined contribution, or cash balance) and why, if you were an employee? An employer?
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Related Questions
- Please answer the following questions about defined benefit pension plans: Companies with defined benefit pension plans must recognize pension expenses each period. What are the five components of pension expense? Briefly describe each component. How does each component of pension expense affect pension expense during the period (increase, decrease, or uncertain)? What is the difference between the accumulated pension obligation and the projected pension obligation? What determines whether a pension plan is underfunded or overfunded?arrow_forward1. Which of the following statements typifies defined contribution plans? Investment risk is borne by the corporation sponsoring the plan. O Retirement benefit is defined by a pension formula O The plans are more complex than defined benefit plans. O The employer's obligation is satisfied by making the periodic contribution to the plan.arrow_forwardXerox reports the following pension and retiree health care ("Other") footnote as part of its 10-K report. Pension Benefits Retiree Health 2010 2009 2010 2009 (in millions) Change in Benefit Obligation Benefit obligation, January 1 $9,194 $8,495 $1,102 $1,002 Service cost 178 173 B 7 Interest cost 575 508 54 60 Plan participants' contributions 11 9 26 36 Plan amendments [19) 4 (86) 1 Actuarial loss (in) 477 209 13 124 Aquistions 140 1 1 Currency exchange rate changes (154) 373 6 15 (1) Curtailments Benefits paid/settlements Benefit obligation, December 31 Change in Plan Assets Fair value of plan assets, January 1 (670) [578] (118) (143) $9,731 $9,194 $1,006 $1,102 $7,561 $6,923 $- $- Actual return on plan assets 846 720 - Employer contribution 237 122 92 107 Plan participants' contributions 11 9 26 36 Aquistions 107 - - Currency exchange rate changes (144) 349 Benefits paid/settlements (669) 15781 (118) (143) Other (9) 16 Fair value of plan assets, December 31 Net funded status at…arrow_forward
- Which of the following factors is least likely to affect the amount of retirement benefits under a defined benefit plan? * A. The employee's length of service B. The level of the employee's compensation C. The age of the retiring employee D. The amount of employer contributions to a fund.arrow_forwardA defined benefit plan is one in which: A.) The employer promises specified payments to employees on their retirement. B.)The specific provisions are defined by the Internal Revenue Code. C.) The specific provisions are defined by the Uniform Code of Retirement Plans. D.) The employee can specify the mix of benefits (e.g., health, pension, insurance) that will be received on retirement.arrow_forwardWhat is meant by past service cost? When is past service cost recognized as pension expense? Differentiate between a defined contribution pension plan and defined benefit pension plan. Explain how the employer’s obligation differs between the two types of plans. What disclosures should be made by lessees and lessors related to future payments?arrow_forward
- In accounting for a defined-benefit pension plan __the expense recognized each period is equal to the cash contribution. ___the liability is determined based upon known variables that reflect future salary levels promised to employees. __the employer's responsibility is simply to make a contribution each year based on the formula established in the plan. __an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.arrow_forwardIndicate by letter whether each of the events listed below increases (I), decreases (D), or has no effect (N) on an employer's periodic pension expense in the year the event occurs. Events 1. Interest cost. _____ 2. Amortization of prior service cost---AOCI. ______ 3.Excess of the expected return on plan assets over the actual return _____ 4. Expected return on plan assets. _____ 5. A plan amendment that increases benefits is made retroactive to prior years. ____ 6. Actuary's estimate of the PBO is increased.…arrow_forwardb. How does each component of pension expense affect pension expense during the period (increase, decrease, or uncertain)? c. What is the difference between the accumulated pension obligation and the projected pension obligation? d. What determines whether a pension plan is underfunded or overfunded?arrow_forward
- Which of the following is not a characteristic of a defined-contribution pension plan? The employer's contribution each period is fixed. If the employer does not make contribution in full, then it reports a pension liability. If the employer contributes more than the required amount, then it reports a pension asset. An appropriate funding pattern must be established to ensure that the promised benefits at employees’ retirement will be met. The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.arrow_forwardIn a defined contribution plan, a formula is used that: Ensures that pension expense and the cash funding will be different Requires an employer to contribute a certain sum each period based on the formula Defines the benefits that the employee will receive at the time of retirement Ensures that the employer is at risk to make sure funds are available at retirementarrow_forwardCarson Company sponsors a single-employer defined benefit pension plan. The plan provides that pension benefits are determined by age, years of service, and compensation. Among the components that should be included in the calculation net pension cost are service cost, interest cost, and actual return on plan assets. Required: A. What two accounting problems result from the nature of the defined benefit pension plan? Why do those problems arise? B. How should Carson determine service cost component of the net pension cost? C. How should Carson determine the interest cost component of the net pension cost? D. How should Carson determine the actual return on plan assets component of the net pension cost?arrow_forward
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Recommended textbooks for you
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
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