The Lucas Company Defined Contribution Pension Plan
What is the Lucas Company's Defined Contribution Pension Plan details for 2014?
The Lucas Company offers employees a defined contribution pension plan. In 2014, Lucas contributed $175,000 to the plan and paid $195,000 to retired employees. Which of the following statements is true?
1) Lucas will record an accrued liability of $20,000.
2) Lucas will report pension expense of $175,000.
3) Lucas will recognize prior service cost of $20,000.
4) Lucas will recognize actuarial gains and losses on the plan over current and future periods.
Answer:
Lucas will report a pension expense of $175,000, which is the amount it contributed to the defined contribution pension plan in 2014. This is separate from the amount paid out to retirees and does not create an accrued liability or recognize prior service cost or actuarial gains and losses.
The student's question pertains to a defined contribution pension plan offered by the Lucas Company. In 2014, Lucas contributed $175,000 to the plan, which paid $195,000 to retirees. We need to ascertain which statement out of the provided options is true.
For a defined contribution plan, the employer's expense and the amount it should report on financial statements is the actual contribution made to the plan for the period in question, regardless of the payments made to pensioners. Therefore, Lucas will report pension expense of $175,000, which is the actual amount it contributed to the plan in 2014.
The difference between what was paid out ($195,000) and what was contributed has no direct immediate effect on the company's pension expense for the year because this amount may come from investment earnings or from the plan's existing resources. Hence, the correct statement is: 2) Lucas will report pension expense of $175,000.
The other options are incorrect because they involve concepts that are not applicable to defined contribution plans. For instance, prior service costs are associated with defined benefit plans, not defined contribution plans, and actuarial gains and losses apply to the measurement of defined benefit obligations and plan assets, again, not a feature of defined contribution plans.