Question

A list of terms (a-i) and a list of descriptive phrases (1-9) related to pension accounting are provided below:

a. actuary
b. expected return on plan assets
c. defined benefit plan
d. noncontributory plan
e. prior service cost
f. service cost
g. accumulated benefits obligation
h. pension expense
i. Pension Reform Act of 1974 (ERISA)

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1. Amount normally recorded at the end of a period and often at the time of funding, although often not equal to the amount of funding.

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2. Uses compound interest techniques with projections of future events to estimate components of pension costs.

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3. Specifically states either postretirement employee benefits or the method of determining such benefits by formula.

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4. Is the primary component of pension cost.

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5. Generally requires service costs to be funded in the current year.

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6. Places the entire pension cost on the employer.

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7. A negative component of pension cost.

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8. Assigns pension costs to the years of service, using the plan formula and the actual history of service and pay.

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9. Is the amount actuarially assigned to years before the inception of the plan.

Required: Match each item to its descriptive phrase by placing the appropriate letter in the space provided.

Answer 1

Matching pension accounting terms with their descriptions helps clarify the various components involved in pension plans, including service costs, actuarial estimates, and pension reform legislation. Traditional defined benefits plans are being replaced by more flexible defined contribution plans like 401(k)s.

Step-by-step explanation:

The question pertains to matching pension accounting terms with their correct descriptions. Here is the list of matches:

1. Pension expense - a: Amount normally recorded at the end of a period and often at the time of funding, although often not equal to the amount of funding.
2. Actuary - b: Uses compound interest techniques with projections of future events to estimate components of pension costs.
3. Defined benefit plan - c: Specifically states either postretirement employee benefits or the method of determining such benefits by formula.
4. Service cost - d: Is the primary component of pension cost.
5. Pension Reform Act of 1974 (ERISA) - e: Generally requires service costs to be funded in the current year.
6. Noncontributory plan - f: Places the entire pension cost on the employer.
7. Expected return on plan assets - g: A negative component of pension cost.
8. Accumulated benefits obligation - h: Assigns pension costs to the years of service, using the plan formula and the actual history of service and pay.
9. Prior service cost - i: Is the amount actuarially assigned to years before the inception of the plan.

Pensions and defined benefits retirement plans have traditionally provided retirees with fixed nominal dollar amounts, often leading to issues with inflation and loss of buying power over time. These types of plans are being replaced by defined contribution plans such as 401(k)s, which are flexible and portable, and potentially protect against inflation effects by allowing for investment growth.