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Week 5 Reflections This week we will be reflecting on Chapter 20 Accounting for Pensions and Postretirement Benefits, and Chapter 22 Accounting changes and Error analysis. The team was asked to distinguish between a defined contribution and a benefit plan, determine the components of pension expenses, calculate pension liability and expense, prepare journal entries associated
the amount varies depending on the sum of contributions to his account.with changes in accounting principles. and the employee continues to receive benefits after he retires till money is present in the trust. The employee continues on receiving the decided benefits after his retirement till his death.and estimates . the benefits are not predefined. Components of pension expense . Employee is responsible for the risk involved and benefits from any profits and suffers from any loss. and prepare journals entries associated with changes due to errors Defined contribution plan versus benefit plan In a defined benefit plan. In a defined contribution plan. All types of risk by this type of plan are employer’s and as risks are taken by the employer. In a number of cases. In a defined contribution plan. both the employer and employee are equal contributors. reporting entities . it is the employer who benefits from any profits and also is responsible for filling up the difference if any loss occurs. Defined contribution plans are normally is held trusted by a third party and the employee has a control on where to invest whereas in a defined contribution plan are assets are controlled and invested for the employee. the employee is the contributor to the investment plan. the sum of benefits has been predefined by a formula that admits the maximum salary of employee and the years he has worked for the company. In a defined benefit plan. employer acts as the contributor to the plan.
The total is calculated at a discounted rate which is decided by market interest rates or rate of return on retirement annuities.There are five components of pension expense: service cost. For calculating the rates of returns on plan assets. The cost of providing retroactive benefits for the left years of service of covered employees is the amortization of previous service cost. interest cost. and early retirement. amortization of previous service cost. The amount is equal to the present value of benefits which are gained during the period of employment of the employee with the company. Stocks. This amount is equal to the present year’s earnings on invested plan assets. Employer must keep the amount of money aside that is the supposed to be the money covering employee benefits for retirement. returns on plan assets. and profits and loss. Normally . the fair value of asset at the start of the year is multiplied by the approximated rate of returns on long term assets. The unpaid balance of projected benefit obligation accumulates as the employee’s service year’s increase and it is known as interest cost. The company subtracts profits and losses for calculation of pension plan expenses. Factors on which service cost is depending are promotions. pay raises. The present values of projected retirement benefits earned in the present year are service costs and are the primary component of pension expense. bonds and other investments are the returns on plan assets.
The requirements for the reporting persons were changed by FASB in 2006. The value of present liabilities is balanced to the benefit payments expected from next . The final calculations are not affecting the pension expenses and not a part of balance sheet. present period difference between envisioned PBO. The PBO is subtracted from the market value of plan assets.employees get credit for services that were provided before any changes were made in the pension plan by the employer. The market value of the assets of a company must be calculated in the starting. Pension expense can also be enhanced if losses are incurred on assets. Calculating pension liability and expense Three calculations can be used for pension expenses: amortization of unknown profit or losses from earlier periods. SFA$ 158 has a requirement that company records pension liabilities in balance sheets. Liability will be present if the fair value of plan assets is lower than PBO. Profit and loss demonstrate change in the employer’s envisioned benefit obligations and any effect of market on plan assets. The status of funding for company’s pension is shown by its liabilities. The next step is calculating the PBO by an actuarial approximate of the present value of benefits the pension plan is paying. differences present between envisioned and actual return on assets for present period. Pension expense is enhanced by service and interest costs whereas pension expense is decreased by rate of return.
000 PBO Liability Current Liability Non-current liabilities $500. . the change is prospective.000 $250. when change in accounting principle occurs.000 $ 50.000 $300. FASB has put the requirement of using the retrospective approach.000 $ 50.000 $250. If the previously accounted material is left the same. Making adjustments as if the change always had always been present are the retrospective changes. Example: Fair value of plan assets $250. In the example demonstrated below a company changes from LIFO to FIFO. changes in company information or change in entities it must be entered in the journals.year that are not covered by fair value of the plan assets. Liabilities more than this amount are regarded as non-current liabilities.000 $200.000 Pension plan expects to pay for next year Fair value of plan assets Current Liability Accounting principle journal entries When a company makes changes in their accounting principles. Those journal entries as a result of modification in accounting principles like changes in the inventory cost for adjusting the assets and liabilities in addition to the earnings retained or respective stockholder’s equity account or total assets. These changes can be described as retrospective or prospective.
If a change in occurs in the accounting estimates the FASB has not permitted the use of retrospective approach. There are some factors of company which can only have estimation like doubtful receivables. Estimated changes are reported by companies only period of change and that too if it only change is affecting the period and if it occurs during the period and also affecting the upcoming periods. The journal entries given below show the raise in the useful health of equipment and the depreciation that occurs after change is applied to the estimation.Account Inventory Debit Previous year’s cumulative changes on inventory/cost of goods sold Credit Retained Earnings Inventory change less Deferred Income Tax deferred taxes Change in inventory value times tax rate Any change in accounting estimations must be recorded. and warranty liabilities. Account Depreciation Expense Debit Credit . asset salvage values.
000 which is balance is carried over to into 2012. so the remaining $18. Journal entries associated with change It is human nature to make errors but as true as this is. however the books are not closed yet. Weitz Company is paying $24.000 to cover the two years rent on June 1. 2012.Accumulated DepreciationEquipment **Same as debit Whenever a company makes modification in the reports of an entity. 2011. only . these errors must be corrected as early as possible. So if the company wants to correct the error. Also. The error is discovered later on in Dec. they are required to modify all the previous financial statements of the period showing the information for the new entity in all periods. it would need to make a journal entry. This could be done as the company could be gathering financial statements or even a change in the subsidiary which are company’s collected financial statements. Only $6000 rent is used in 2011. Given below is an example where errors have counterbalanced. The complete amount is debited to rent expense at the time. Most of the errors shall usually be counter balancing each other and there is no need for any more entries if the books have been closed. The reason and nature of change must be stated in the disclosure to the financial statements in addition to the period effect which involve the change on income per extraordinary items. the net income of the company and the earnings per share.
000 2. Assuming the books hasn’t been closed for the present year.000 6. Such type of correcting entry is shown below in an example: Assuming that on June 1.000 Credit 18. 31 Description Machinery Depreciation Expense Retained Earnings Debit 28.000 having a useful of five years and salvage value of $3. so still a balance of $6000 will be carried forward into 2013 as prepaid rent. The company needs to make the following entry for correcting the error if books haven’t been closed yet: Date Dec. The error was discovered in 2012.00 0 Such errors are also present that are not counterbalanced.000. Such errors require an entry to correct them even if the closure of books has occurred.000 of the will be utilized in 2012.500 Credit 25.$12. So the journal entry that needs to be made for correcting the error in 2012 is as follows: Date Dec. 2011 Weitz Company purchased a new skid loader for a price of $28. 31 Description Rent Expense Prepaid Rent Retained Earnings Debit 12. The skid loader had been incorrectly expensed in 2011.50 0 .
the company shall not want to expense the previous depreciation in 2013.000) Let’s assume the books have closed for 2012. 31 Description Machinery Retained Earnings Accumulated Depreciation Debit 28.50 0 7.500 28.500 .00 0 3.000 Credit 21.00 0 5.Accumulated Depreciation Depreciation Calculation Cost of skid loader Less: salvage value 7.000 25. Following entries would be needed to be done: Date Dec.000 Yearly depreciation (20% x $25.
.References Kieso. Hoboken. & Warfield. E. (2010).. .). J. D. T. NJ: Wiley. D. Weygandt. J. Intermediate Accounting (13th ed.
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