Videos
Recognizing pension expense
The annual examination of Felton Company’s financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana):
Sumana: You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved.
Francie: What’s that?
Sumana: Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees.
Francie: Wait a minute. I think you have it all wrong. The company doesn’t have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of these employees may not reach retirement, and if they don’t, the company doesn’t owe them anything.
Sumana: You’re not really seeing this the right way. The pension is earned by your employees during their working years. You actually make the payment much later—when they retire. It’s like one long accrual—much like incurring wages in one period and paying them in the next. Thus, I think you should recognize the expense in the period the pension is earned by the employees.
Francie: Let me see if I’ve got this straight. I should recognize an expense this period for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties: salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don’t think an amount can be determined even if I accepted your arguments.
Evaluate Sumana’s position. Is she right, or is Francie correct?
Trending nowThis is a popular solution!
Chapter 11 Solutions
Financial Accounting
- Olympic Corporation purchased equipment for $480,000 on July 1, 2012. The estimated service life is eight years with a $48,000 residual value. Olympic records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2012, using straight-line depreciation, is? Helparrow_forwardCan you explain the process for solving this financial accounting question accurately?arrow_forwardFiona Industries plans to produce 30,000 units next period at a denominator activity of 60,000 direct labor hours. The direct labor wage rate is $16.50 per hour. The company's standards allow 2.2 yards of direct materials for each unit of product; the material costs $10.50 per yard. The company's budget includes a variable manufacturing overhead cost of $3.25 per direct labor hour and fixed manufacturing overhead of $285,000 per period. Using 60,000 direct labor hours as the denominator activity, compute the predetermined overhead rate and break it down into variable and fixed elements.arrow_forward
- Can you help me solve this general accounting problem using the correct accounting process?arrow_forwardI need help with this problem and accountingarrow_forwardMao Manufacturing has a net working capital of $15,600, current assets of $42,800, equity of $73,200, and long-term debt of $18,400. What is the amount of net fixed assets?arrow_forward
- Please provide the accurate answer to this financial accounting problem using appropriate methods.arrow_forwardI need assistance with this general accounting question using appropriate principles.arrow_forwardI am trying to find the accurate solution to this general accounting problem with the correct explanation.arrow_forward
- Quick answer of this general accounting questionarrow_forwardSolve this Financial Accounting MCQarrow_forwardBeta Manufacturing purchased equipment for $86,000 with an estimated salvage value of $6,000 and a useful life of 8 years. What is the annual depreciation expense using the straight-line method?arrow_forward
Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning