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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Fink Company is considering establishing a defined benefit pension plan for its employees. Fink’s president is slightly familiar with GAAP and understands that accounting for a defined benefit pension plan may result in certain items being included in the financial statements of the sponsoring company. The president has come to you for help in better understanding these items.

Required:

List each item, summarize how it is calculated, and briefly explain its meaning.

To determine

List the items of the defined benefit pension plan that are included in the financial reporting and explain its meaning, and also describe the manner in which it is calculated.

Explanation

Defined benefit pension plan: A pension plan is an agreement between the company and its employees in which the company decides to pay the employees a certain benefits in the form of fund, after the retirement. The employee’s future benefit can be usually calculated by a formula on the basis of a combination of the number of years of employee service and employee income. These benefits are paid usually on the monthly basis and the amount that the company contributes into the plan depends on the future needs of the plan.

List the items of the defined benefit pension plan that are included in the financial reporting as follows:

1.      Pension expenses:

The pension expense is portion of the cost of the employees’ pension benefits over the employees’ service period and reflects the terms of the plan.

The pension expense reported on the income statement is computed as follows:

ParticularsAmounts ($)
Service costXX
Add: interest on the projected benefit obligationXX
Less: Expected return on plan assetsXX
Add: Amortization of any prior service costXX
Add: Recognition ...

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