Question

Please answer the following questions about defined benefit pension plans:(1). Companies with defined benefit pension plans must recognize pension expense each period. What are the five components of pension expense? Briefly describe each component.(2). How does each component of pension expense effect pension expense during the period (increase, decrease, or uncertain)?(3). What is the difference between the accumulated pension obligation and the projected pension obligation?(4). What determines whether a pension plan is underfunded or overfunded? (CH9)

Answer 1

Ques 1.The components of pension expense are:
a.Service Cost - the increase in the PBO due to employee's working anadditional year.
b.Interest Cost - the increase in the PBO due to the passage of time.
c.Expected Return on Pension Investments - the expected change in themarket value of plan assets due to interest, dividends and changes inmarket value.
d.Amortization of Prior Service Cost - the amortization of any plan changesthat increase future benefits.
e.Amortization of Gains/Losses - the amortization of the actuarial gains andlosses when actual returns differ from expectations and when the actuarialassumptions underlying the pension plan change.

Ques 2.How each effects pension expense:
a.Service Cost - increase
b.Interest Cost - increase
c.Expected Return on Plan Assets - decrease
d.Amortization of net pension asset/liability - increase or decrease
e.Amortization of Prior Service Cost - increase
f.Amortization of Gains/Losses - could be an increase or decrease

Ques 3.The ABO is the present value of expected employees' benefits based onservice to date using current salary amounts.The PBO is the present value of employees' benefits based on service to date,but using expected future salary amounts.

Ques 4.A pension plan is underfunded when the fair value of Plan Assets are less thanthe ABO