Good Ltd owns a defined employee benefit plan. The terms of the plan are as foll

Question

Good Ltd owns a defined employee benefit plan. The terms of the plan are as follows:
– employees contribute 6% of their salaries to the plan.
– Currently, Good Ltd contributes the same amount to the plan for the benefit of the employees.
– On retirement, employees are guaranteed a pension which is based upon the number of years’ service with the company and their final salary.

The following details related to the plan in 2015:

The discount rate for the plan is 5%.

Required:
i. Explain the major differences between a defined contribution scheme and a defined benefit scheme.
ii. Prepare journal entries for the employee benefit plan for Good Ltd for the year ended 31 December 2015.
iii. Calculate the actuarial gains and losses on plan obligation and return on plan assets.
iv. Show the statement of profit or loss and other comprehensive income extract for the year ended 31 December 2015.
v. Show the statement of financial position extract as at 31 December 2015.

Present value of obligation at 1 January 2015 $400m Present value of obligation at 31 December 2015 $490m Fair value of plan assets at 1 January 2015 $380m Fair value of plan assets at 31 December 2015 $443m Current service cost $55m Pension benefits paid on 2 January 2015 $40m Total contributions paid to the scheme on 2 January 2015 $60m

Explanation / Answer

i)Main difference:

Confident about retirement : In the defined benefit scheme amount was spent by the employer, This scheme assured employee after retirement also they have monthly benefits.

Employer have more responsibility

Defined contribution scheme there is no assurance after retirement monthly benefits, Employer or employee may contribution for individual types of plan.(Examples of 401(k) plan,Simple 401(k),employee stock ownership plan (ESOP),

Employee has more responsibility

_________________________________________________________________________________________

II)Date:::::::::::::::::::::::::::Particulars:::::::::::::::::::::::::LF:::::::Debit::::::::::::::::Credit

January 2,2015:::::By Pension Expense A/c Dr::::::N/A::::$60,000,000

                                     To Cash A/c            :::::::::N/A::::::::::::::::::::::::::$60,000,000

(Being contirbution paid on the scheme has recorded)

_____________________________________________________________________

III)

Particulars::::::::::::::::::::::::::::::::::::Amount:::::::::Particulars:::::::::::::::::::::::::::::::Amount:

Present value of obligation::::::::::$400,000,000::Fair value :::::::::::::::::::::::$380,000,000

ADD:

Current service cost::::::::::::::::::$55,000,000:::::INterest cost$380,000,000*5/100=$19m

Interest Cost 400,000,000*5/100=$20,000,000:::Contibution:::::::::::::$60,000,000

Amortization gains=:::::::::::::::::::::::$55,000,000::::Amortization gains ::::::$24,000,000

Less:

Pension benefits paid ::::::::::::::$40,000,000:::::::Pension benefits paid::$40,000,000

_____________________________________________________________________

Present value of obligation at end$490,000,0000Fair value:::::::::::::::$443,000,000

actuarial loss =Fair value is less than present value

=$443,000,000 - $490,000,0000

=$47,000,000

____________________________________________________________________

IV)statement of profit or loss and other comprehensive income extract for the year ended 31 December 2015

other comprehensive income

Actuarial loss::::::::::::::::::::::::$47,000,000

_______________________________________________

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