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Intermediate Accounting II Chapter 20 Accounting for Pensions Overview of Employer's Accounting for Pension Plans Defined contribution plan - employer agrees to make a defined contribution to a pension plan plan participants receive whatever benefits have accumulated each year, employer records an expense an a related liability for the contribution Defined benefit plan - employer agrees to provide a benefit at retirement that is defines or fixed by formula employer accepts risk of meeting the obligation upon employee's retirement requires use of complex actuarial estimates Involves 2 accounting entities employer sponsor - reports pension expense on the income statement, and…show more content…
interest rate is called the settlement rate (reflects the rates at which pension benefits are expected to be settled) Interest for the year is calculated on the PBO at the beginning of the year (ie use simple interest) in the worksheet, interest is accounted for by debiting Pension expense (income statement account) and crediting PBO (off-balance sheet account) Actual Return on Plan Assets decreases pension expense when return is positive, increases pension expense when return is negative (ie, the more the assets increase in value, the less the employer has to contribute to cover pension costs) df = (change in the FV of the plan assets from the beginning to the end of the year) + benefits paid to employees - contributions from employer NOTE: although the actual return on plan assets is measured and disclosed as one of the components of
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