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ACCT 1A Lecture Notes - Lecture 27: Pension, Life Insurance

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School
Irvine Valley College
Department
Accounting
Course
ACCT 1A
Professor
urell

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Document Summary

In a defined contribution program, the employer makes cash payments to an. When an employee retires, they are entitled to a portion of the fund. The employees bear the risk associated with the investments in the plan. The employer"s only obligation is to make the required annual payments to the. Other employers offer defined benefit programs fund, which are recorded as pension expense. Under these programs, an employee"s retirement benefits are based on a percentage of his or her pay at retirement or a certain amount of money for each year of employment. In this case, the amount of pension expense that must be accrued each year is the change in the current cash value of the employee"s retirement package. The current cash value changes as (1) employees get closer to receiving benefits, (2) as employees retirement benefits increase because of higher pay or longer service or (3) if the employee"s life expectancies change.

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Related Questions

PLEASE READ THE ENTIRE PROMPT AND ONLY ANSWER IF YOU ARE GOINGTO ANSWER THE QUESTION IN ITS ENTIRETY.

On January 1, x1, Brown Corp initiated a noncontributory definedbenefit pension plan for all six employees in its word processingdepartment. The plan benefit formula provides that each year ofservice earns each employee an annual retirement benefit of $4,000.The benefits are payable at the end of each year of retirement. Allsix employees are expected to retire on December 31, x6, and eachis expected to live for six years following retirement.

Brown Corp also provided retroactive benefits for employeeservices rendered prior to January 1, x1. Total years of servicefor which retroactive benefits were granted equaled 24 years (forall six employees combined rather than 24 years per employee). Theexpected return on plan assets is 10%. The settlement rate is8%.

Brown Corp will contribute an equal amount each year to thepension fund, which together with earnings at 10% is expected tofully fund the projected benefit obligation by December 31, x6.Brown Corp will make six annual contributions, beginning January 1,x1. Brown Corp will purchase annuity contracts on December 31, x6to settle its pension obligation.

Assume actual results equal the original estimates andassumptions. The tax rate is 40%.

Required:

Draw a time line to show the relationship between the pensionplan and the employment and retirement life of Brown Corp’semployees. Be sure to show the total amount of benefits expected tobe paid each year (to all employees combined) during the expectedretirement period.

Calculate the amount that Brown Corp should contribute to thepension fund each year.

Calculate Prior Service Cost at the inception of the plan.

Calculate Service Cost for each year of service (for allemployees combined).

Using a spreadsheet, prepare a schedule that calculates for eachyear of service:

Pension Expense (you may simply input the numbers calculated in2-4 above)

Prepaid/Accrued Pension Cost (the amount of the debit or creditand the account balance)

The amount funded

The fund balance

The year end projected benefit obligation

The funded status

Include a column for each element of pension expense. You do notneed for the spreadsheet to calculate present values. Instead youmay simply put in the values calculated by hand in parts 2-5. Printyour schedule.

Prepare journal entries for all years.

Show what will appear in financial statements (Balance Sheet,Income Statement, and Statement of Cash Flows) for all years.

Would it be possible to get an answer to the below questions(with calculations so that I can understand how to get theanswers).

Net Assets and Employees’ Retirement Fund

Complete the following activities and submit your answers toyour instructor in a Word document formatted to proper APAspecifications. Include any relevant supporting computations andexplanations.

Pension Trust Funds:

7-13:

Review the financial information pertaining to the City ofSweetwater in problem 7-13 on pages 220-221 of your text. Reviewthe transactions that occurred during the year ended June 30, 2015and complete the following:

a. Record the transactions on the books of theEmployees’ Retirement Fund.

b. Prepare a Statement of Changes in Fiduciary NetPosition for the Employees’ Retirement Fund for the Year Ended June30, 2015.

c. Prepare a Statement of Fiduciary Net Position for theEmployees’ Retirement Fund as of June 30, 2015.

The City of Sweetwater maintains an Employees’ Retirement Fund,a single-employer defined benefit plan that provides annuity anddisability benefits. The fund is financed by actuarially determinedcontributions from the city’s General Fund and by contributionsfrom employees. Administration of the retirement fund is handled byGeneral Fund employees, and the retirement fund does not bear anyadministrative expenses. The Statement of Fiduciary Net Positionfor the Employees’ Retirement Fund as of July 1, 2014, is shownhere:

CITY OF SWEETWATER

Employees’ Retirement Fund

Statement of Fiduciary Net Position

As of July 1, 2014

Assets

Cash

$120,000

Accrued Interest Receivable

65,000

Investments, at Fair Value:

Bonds

4,500,000

Common Stocks

1,300,000

Total Assets

5,985,000

Liabilities

Accounts Payable and Accrued Expenses

350,000

Fiduciary Net Position Restricted for Pensions

$5,635,000

During the year ended June 30, 2015, the following transactionsoccurred:

1. The interest receivable on investments was collected incash.

2. Member contributions in the amount of $250,000 were receivedin cash.

The city’s General Fund also contributed $750,000 in cash.

3. Annuity benefits of $700,000 and disability benefits of$150,000 were recorded a liabilities.

4. Accounts payable and accrued expenses in the amount of$900,000 were paid in cash.

5. Interest income of $240,000 and dividends in the amount of$40,000 were received in cash. In addition, bond interest income of$60,000 was accrued at year-end.

6. Refunds of $133,000 were made in cash to terminated,nonvested participants.

7. Common stocks, carried at a fair value of $500,000, were soldfor $480,000. That $480,000, plus an additional $300,000, wasinvested in stocks.

8. At year-end, it was determined that the fair value of stocksheld by the pension plan had decreased by $40,000; the fair valueof bonds had increased by $35,000.

9. Nominal accounts for the year were closed.

a. Record the transactions on the books of theEmployees’ Retirement Fund.

b. Prepare a Statement of Changes in Fiduciary NetPosition for the Employees’ Retirement Fund for the Year Ended June30, 2015.

c. Prepare a Statement of Fiduciary Net Position for theEmployees’’ Retirement Fund as of June 30, 2015.

Please build the answer based on the following text from astudying book:

Reporting Pension Contributions and Adjustments The followingare some general year-end reporting guidelines employers shouldfollow when reporting pension contributions and pension adjustments(PAs):
 employee contributions to a registered pension plan (RPP) are taxdeductible; they are reported in box 20 on the T4 slip


 employee and employer contributions to a defined contributionpension plan are part of the PA that is reported in box 52


 PAs are reported on the T4 slip; however, under certainconditions the PA may be reported on the T4A slip


 employee contributions to a Registered Retirement Savings Plan(RRSP) are not reported by payroll; the employee will receive a taxreceipt from their financial institution


 employer contributions to an employee’s RRSP are reported on theT4 slip in box 14 and in the Other Information area using code 40as they are a cash taxable benefit, subject to CPP contributionsand EI premiums

Question:

Your organization currently has a defined contributionpension plan with employees contributing up to 3% with a companymatch. Effective with the first pay of the new year, new employeeswill no longer be enrolled in that plan. Instead, they will beenrolled in the new Group Registered Retirement Savings Plan (RRSP)with the same contribution options. In your ownwords, explain the difference in the T4 information slipreporting for these two groups of employees.