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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 employee continues on receiving the decided benefits after his retirement till his death. the amount varies depending on the sum of contributions to his account. In a defined contribution plan.with changes in accounting principles. the employee is the contributor to the investment plan. In a defined contribution plan.and estimates . and the employee continues to receive benefits after he retires till money is present in the trust. it is the employer who benefits from any profits and also is responsible for filling up the difference if any loss occurs. Components of pension expense . 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. In a defined benefit plan. the benefits are not predefined. employer acts as the contributor to the plan. both the employer and employee are equal contributors. In a number of cases. All types of risk by this type of plan are employer’s and as risks are taken by the employer. 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. reporting entities . and prepare journals entries associated with changes due to errors Defined contribution plan versus benefit plan In a defined benefit plan. Employee is responsible for the risk involved and benefits from any profits and suffers from any loss.
Normally . The total is calculated at a discounted rate which is decided by market interest rates or rate of return on retirement annuities. Stocks. The present values of projected retirement benefits earned in the present year are service costs and are the primary component of pension expense. interest cost. For calculating the rates of returns on plan assets. pay raises. Factors on which service cost is depending are promotions. and profits and loss. returns on plan assets. This amount is equal to the present year’s earnings on invested plan assets. amortization of previous service cost. bonds and other investments are the returns on plan assets. The company subtracts profits and losses for calculation of pension plan expenses. and early retirement.There are five components of pension expense: 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. The cost of providing retroactive benefits for the left years of service of covered employees is the amortization of previous service cost. the fair value of asset at the start of the year is multiplied by the approximated rate of returns on long term assets. Employer must keep the amount of money aside that is the supposed to be the money covering employee benefits for retirement. The unpaid balance of projected benefit obligation accumulates as the employee’s service year’s increase and it is known as interest cost.
The requirements for the reporting persons were changed by FASB in 2006. differences present between envisioned and actual return on assets for present period. present period difference between envisioned PBO. The final calculations are not affecting the pension expenses and not a part of balance sheet. Pension expense can also be enhanced if losses are incurred on assets. The status of funding for company’s pension is shown by its liabilities. Profit and loss demonstrate change in the employer’s envisioned benefit obligations and any effect of market on plan assets. Calculating pension liability and expense Three calculations can be used for pension expenses: amortization of unknown profit or losses from earlier periods. The PBO is subtracted from the market value of plan assets. SFA$ 158 has a requirement that company records pension liabilities in balance sheets. The next step is calculating the PBO by an actuarial approximate of the present value of benefits the pension plan is paying. Liability will be present if the fair value of plan assets is lower than PBO. Pension expense is enhanced by service and interest costs whereas pension expense is decreased by rate of return. The value of present liabilities is balanced to the benefit payments expected from next . The market value of the assets of a company must be calculated in the starting.employees get credit for services that were provided before any changes were made in the pension plan by the employer.
when change in accounting principle occurs. 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. 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. Example: Fair value of plan assets $250. Making adjustments as if the change always had always been present are the retrospective changes.000 $250.000 $300. . FASB has put the requirement of using the retrospective approach. These changes can be described as retrospective or prospective.000 $250.000 $ 50.000 $ 50. the change is prospective.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. Liabilities more than this amount are regarded as non-current liabilities.000 PBO Liability Current Liability Non-current liabilities $500. In the example demonstrated below a company changes from LIFO to FIFO. If the previously accounted material is left the same.
Account Depreciation Expense Debit Credit . 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. There are some factors of company which can only have estimation like doubtful receivables.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. If a change in occurs in the accounting estimates the FASB has not permitted the use of retrospective approach. 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. and warranty liabilities. asset salvage values.
000 to cover the two years rent on June 1. Only $6000 rent is used in 2011. however the books are not closed yet. they are required to modify all the previous financial statements of the period showing the information for the new entity in all periods. the net income of the company and the earnings per share. Also. 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.000 which is balance is carried over to into 2012. 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. Given below is an example where errors have counterbalanced.Accumulated DepreciationEquipment **Same as debit Whenever a company makes modification in the reports of an entity. Weitz Company is paying $24. so the remaining $18. it would need to make a journal entry. The complete amount is debited to rent expense at the time. Journal entries associated with change It is human nature to make errors but as true as this is. So if the company wants to correct the error. only . The error is discovered later on in Dec. these errors must be corrected as early as possible. 2011. 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. 2012.
The error was discovered in 2012. The company needs to make the following entry for correcting the error if books haven’t been closed yet: Date Dec.000 2.000 having a useful of five years and salvage value of $3.00 0 Such errors are also present that are not counterbalanced. 2011 Weitz Company purchased a new skid loader for a price of $28. The skid loader had been incorrectly expensed in 2011. Such errors require an entry to correct them even if the closure of books has occurred.$12.000. Assuming the books hasn’t been closed for the present year.000 6. 31 Description Rent Expense Prepaid Rent Retained Earnings Debit 12.500 Credit 25.000 of the will be utilized in 2012. So the journal entry that needs to be made for correcting the error in 2012 is as follows: Date Dec.50 0 . 31 Description Machinery Depreciation Expense Retained Earnings Debit 28. Such type of correcting entry is shown below in an example: Assuming that on June 1.000 Credit 18. so still a balance of $6000 will be carried forward into 2013 as prepaid rent.
000 Yearly depreciation (20% x $25.00 0 5. 31 Description Machinery Retained Earnings Accumulated Depreciation Debit 28.500 .500 28.000) Let’s assume the books have closed for 2012.Accumulated Depreciation Depreciation Calculation Cost of skid loader Less: salvage value 7.50 0 7.000 Credit 21.00 0 3. Following entries would be needed to be done: Date Dec. the company shall not want to expense the previous depreciation in 2013.000 25.
Weygandt.. D. .. E. D. & Warfield. J. (2010). J.References Kieso. Intermediate Accounting (13th ed.). NJ: Wiley. T. Hoboken.
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