close solutoin list

Recognizing pension expense The annual examination of Felton Company's financial statements by its external public accounting firm (auditors) is nearing completion. ’The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana): Sumana. You know, Francie. we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved Francie: What’s that? Sumana. Well, as you know, at the beginning of the year. Felton began a defined benefit pension plan This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees. Francie: Wait a minute I think you have it all wrong The company doesn't have a pension expense until it actually pays the pension in cash when the employee retires After all some of these employees may not reach retirement, and if they don’t, the company doesn't owe them anything Sumana. You're not really seeing this the right way The pension is earned by your employees dunng their working years You actually make the payment much later—when they retire. It's like one long accrual—much like incurring wages in one period and paying them in the next Thus. I think you should recognize the expense in the period the pension is earned by the employees. Francie: Let me see if I’ve got this straight I should recognize an expense this penod for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties, salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don’t think an amount can be determined even if I accepted your arguments. Evaluate Sumana’s position. Is she right, or is Francie correct?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 11, Problem 11.6CP
Textbook Problem

Recognizing pension expense

The annual examination of Felton Company's financial statements by its external public accounting firm (auditors) is nearing completion. ’The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana):

Sumana. You know, Francie. we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved Francie: What’s that?

Sumana. Well, as you know, at the beginning of the year. Felton began a defined benefit pension plan This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees.

Francie: Wait a minute I think you have it all wrong The company doesn't have a pension expense until it actually pays the pension in cash when the employee retires After all some of these employees may not reach retirement, and if they don’t, the company doesn't owe them anything

Sumana. You're not really seeing this the right way The pension is earned by your employees dunng their working years You actually make the payment much later—when they retire. It's like one long accrual—much like incurring wages in one period and paying them in the next Thus. I think you should recognize the expense in the period the pension is earned by the employees.

Francie: Let me see if I’ve got this straight I should recognize an expense this penod for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties, salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don’t think an amount can be determined even if I accepted your arguments.

Evaluate Sumana’s position. Is she right, or is Francie correct?

Expert Solution

Want to see this answer and more?

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

See solution

Chapter 11 Solutions

Accounting
Show all chapter solutions
Ch. 11 - Proceeds from notes payable On May 15, Maynard Co....Ch. 11 - Proceeds from notes payable On January 26, Nyree...Ch. 11 - Federal income tax withholding Tam Worldly's...Ch. 11 - Federal Income tax withholding Marsha Mellow's...Ch. 11 - Employee net pay Tam Worldlys weekly gross...Ch. 11 - Employee net pay Marsha Mellows weekly gross...Ch. 11 - Journalize period payroll The payroll register of...Ch. 11 - Journalize period payroll The payroll register of...Ch. 11 - Journalize payroll tax The payroll register of...Ch. 11 - Journalize payroll tax The payroll register of...Ch. 11 - Vacation pay and pension benefits Fukushima...Ch. 11 - Vacation pay and pension benefits Regling Company...Ch. 11 - Estimated warranty liability EarlKeen Co. sold...Ch. 11 - Estimated warranty liability Quantas Industries...Ch. 11 - Quick ratio Nabors Company reported the following...Ch. 11 - Quick ratio Adieu Company reported the following...Ch. 11 - Current liabilities Born Nebo Co. sold 25,000)...Ch. 11 - Entries for notes payable Cosimo Enterprises...Ch. 11 - Entries for discounting notes payable Ramsey...Ch. 11 - Evaluating alternative notes A borrower has two...Ch. 11 - Entries for notes payable A business issued a...Ch. 11 - Entries for discounted note payable A business...Ch. 11 - Entries for notes payable Bull City Industries is...Ch. 11 - Current portion of long-term debt PepsiCo, Inc,...Ch. 11 - Calculate payroll An employee cams 25 per hour and...Ch. 11 - Calculate payroll Breakin Away Company has three...Ch. 11 - Summary payroll data In the following summary of...Ch. 11 - Payroll tax entries According to a summary of the...Ch. 11 - Payroll entries The payroll register for Gamble...Ch. 11 - Payroll entries Urban Window. Company had gross...Ch. 11 - Payroll internal control procedures Big Howies Hot...Ch. 11 - Internal control procedures Dave's Scooters is a...Ch. 11 - Accrued vacation pay A business provides its...Ch. 11 - Pension plan entries Yuri Co. operates a chain of...Ch. 11 - Defined benefit pension plan terms In a recent...Ch. 11 - Accrued product warranty Parker Manufacturing Co....Ch. 11 - Accrued product warranty General Motors...Ch. 11 - Contingent liabilities Several months ago, Ayers...Ch. 11 - Quick ratio Gmeiner Co. had the following current...Ch. 11 - Quick ratio The current assets and current...Ch. 11 - Liability transactions The following items were...Ch. 11 - Entries for payroll and payroll taxes The...Ch. 11 - Wage and tax statement data on employer FICA tax...Ch. 11 - Payroll register The following data for Throwback...Ch. 11 - Payroll accounts and year-end entries The...Ch. 11 - Liability transactions The following items were...Ch. 11 - Entries for payroll and payroll taxes The...Ch. 11 - Wage and tax statement data and employer FICA tax...Ch. 11 - Payroll register The following data for Flexco...Ch. 11 - Payroll accounts and year-end entries The...Ch. 11 - Selected transactions completed by Kornett Company...Ch. 11 - Ethics in Action Tonya Latirno is a staff...Ch. 11 - Ethics in Action Marvin Turner was discussing...Ch. 11 - Communication WBM Motorworks is a manufacturer of...Ch. 11 - Recognizing pension expense The annual examination...Ch. 11 - Contingent liabilities Reynolds American, Inc.,...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
What were Elton Mayos conclusions from the Hawthorne Studies?

Foundations of Business (MindTap Course List)

What is the objective of a transaction log?

Accounting Information Systems

PORTFOLIO BETA A mutual fund manager has a 20 million portfolio with a beta of 1.5. The risk-free rate is 4.5%,...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Describe the differences between process costing and job-order costing.

Cornerstones of Cost Management (Cornerstones Series)