Employee Related Costs
Employers remit full 12.4% of FICA to government up to a maximum wage base of
$118,500
Defined Benefit=
% x Salary Level x Credits for Years of Service
Employee stock purchase plans are non-compensatory is
-Plan is made available to substantially all employees -After the plan is established, there is a maximum 1 month period to elect to participate in the plan -The discount in not larger than 5% of the open market price, or if a greater discount is offered, the discount can be justified
Interest on the PBO
-Use effective interest rate of amortization -The obligation increases by the accrued interest on the obligation each year -An actuary determines the settlement rate, which is the interest rate used to compute interest on the PBO
If an employer pays a state unemployment tax rate of 5.4% or more, it is only subject to a
0.6% FUTA rate
4 criteria for employer to report expense and accrue a liability for future paid absences:
1.) Obligation for future payment is a result of services already performed by the employee 2.) The benefits to be paid are either VEST or ACCUMULATE 3.) The future payment must be probable 4.) The future payment must be reasonably estimable
The current year net gains and losses arise from 2 sources:
1.) The difference between the expected return on plan assets and the actual return 2.) Changes in actuarial assumptions related to the PBO
In restricted stock plans, the restrictions attached often include the following provisions:
1.) The employee must remain with the employer for a specified number of years (vesting period) before selling the awarded shares 2.) The employee is NOT TAXED in the award nor may the employer take a tax deduction for the compensation expense until the restrictions expire
Employee compensation is classified as a liability in the following situations:
1.) The option is granted for the acquisition of securities classified as liabilities, such as redeemable preferred stock 2.) The employee can sell back the acquired shares to the employer corporation at the exercise price within a reasonable period of time (employee doesn't absorb any risk) 3.) The compensation is the form of stock appreciation rights (SARs) where the employee receives cash for the amount of the increase in share value over a pre-established price over a fixed period of time.
3 methods for measuring a company's pension obligation
1.) Vested benefit obligation (VBO) 2.) Accumulated benefit obligation (ABO) 3.) Projected benefit obligation (PBO)
Employer share of medicare/Employee share of medicare
1.45%;1.45%
1/1/15 issued 10,000 shares of $1 par value, restricted stock to one of its key executives. Unrestricted shares currently have market value of $30/share on date of issue. Restricted shares require a vesting period of 3 years/ J/E required for 205
1/1/15 DR. Deferred Compensation- Restricted Stock 300,000 CR. Common Stock 10,000 CR. APIC 290,000 *$30 market value * 10,000 shares
1/1/15 issued 10,000 shares of $1 par value, restricted stock to one of its key executives. Unrestricted shares currently have market value of $30/share on date of issue. Restricted shares require a vesting period of 3 years/ Executive leaves company on 1/1/16, one year after the shares were issued J/E to record forfieture of stock issue
1/1/16 DR. Common Stock 10,000 DR. APIC 290,000 CR. Deferred Compensation Expense- Restricted Stock 200,000 CR. Compensation Expense 100,000 (to derecognize 2015 expense recogntition) If an employee terminates before vesting, the company reverses the share issue, derecognizes the deferred compensation, and reverses the expense recognition to date.
FICA tax rate is
12.4%
1/1/15 issued 10,000 shares of $1 par value, restricted stock to one of its key executives. Unrestricted shares currently have market value of $30/share on date of issue. Restricted shares require a vesting period of 3 years/ J/E 12/31/15-12/31/17
12/15, 12/16, 12/17 DR. Compensation Expense 100,000 CR. Deferred Compensation- Restricted stock 100,000 Accruing the 300,000 ($30*10,000shares) over the 3 year vesting period
1/2/15 granted employee stock options for 100,000 shares of $1.0 par value common stock with exercise price of $25/share. Market price on 1/2/15 was also $25/share. 2 year vesting period, 5 year total option period. Estimated fair value $30/share. Estimate no forfeiture. Employees have right to sell the shares back to the company within 3 months of the exercise.
12/31/15 & 12/31/26: DR. Compensation Expense 1,500,000 CR. Liability for Stock-Based Compensation 1,500,000 ($30 FV * 100,000 shares) = 3,000,000 / 2 year vesting = 1,500,000 per year
Zebra motors initiated a share-appreciation rights plan on 1/1/15 by granting 30,000 rights to its key executives. Executives will receive a cash payment equal to the difference between the pre-established price of $25 per share and the market price of the company's common stock on the date of exercise. 3 year vesting period, and SAR cannot be exercised before 1/1/18. Plan expires on 1/1/19. Closing mkt price 12/31/15: $29, 12/31/19: $32, 12/31/17: $28. SARS are all exercised on 1/1/18 when the market price is $28. When executives exercise the SAR:
12/31/17 DR. Obligation under SAR 90,000 CR. Cash 90,000 (Cumulative expense accrued)
Medicare rate is
2.9%
Employer receives credit for up to ____ of unemployment taxes paid to the state
5.4%
FUTA rate is ____ on first ____ paid to each employee during the year
6%, $7000
Employer share of FICA; Employee share of FICA
6.2%; 6.2%
Stock Appreciation Rights (SARs)
A form of compensations that is similar to a bonus tied to the stock price of the employer's share that compensate the employee for the increase in stock price over a pre-established price.
Forfeiture estimates
After determining the fair value of the stock options, the company allocated this amount, adjusted for the percentage of the options that are expected to be forfeited, to compensation expense over the vesting period.
1/2/15 granted employee stock options for 100,000 shares of $1.0 par value common stock with exercise price of $25/share. Market price on 1/2/15 was also $25/share. 2 year vesting period, 5 year total option period. Estimated fair value $30/share. Estimate no forfeiture. Employees have right to sell the shares back to the company within 3 months of the exercise. Reports fair value of the award as of 12/31/15 is $3,200,000 and its fair value as of 12/31/16 is $3,125,000
At each B/S date, companies re-measure the liability and compensation expense to fair value until the award is settled. 1.) Total compensation expense at fair value * % of options expected to vest = Expected compensation expense 2.) Expected compensation expense * cumulative rate of amortization = cumulative compensation expense 3.) Cumulative compensation expense - Expense recognized in previous years = Compensation expense CY 2015: $3,200,000 * 100%=3,200,000 * 1/2= $1,600,000 - 0= $1,600,000 compensation expense 2016: $3,125,000*100%= 3,125,000 * 2/2= 3,125,000 - 1,600,000 = 1,525,000 compensation expense
Income of $100,000 before considering bonus expense. According to terms of bonus agreement, co. must set aside 20% of income for distribution to employees. Bonus itself is an expense that co. must deduct to determine the amount of income on which the bonus is to be based.
B= .2(100,000 - B) B= $20,000 - 0.2B 1.2B= $20,000 B= $16,666.67
J/E to record Vacation Accrual
CY DR. Vacation Wage Expense CR. Cash ((Earned vacay weeks-Weeks elected to carry over)*Avg weekly wage rate) DR. Vacation Wage Expense CR. Liability (Weeks elected to carry over * Avg weekly wage rate) Following Yr DR. Liability CR. Cash
CY employees earned 2,250 weeks of vacation. Employees elect to carry over a total of 850 vacation weeks to the following year. Average wage rate $900/week. Now when employees take the carried over vacation, the actual wage rate is $950 not the estimates $900
CY: DR. Vacation Wage Expense 1,260,000 CR. Cash 1,260,000 (2,250-850)*$900 DR. Vaction Wage Expense 765,000 CR. Liability 765,000 (850*$900) Following Yr: DR. Vacation Wage Expense 42,500 DR. Liability 765,000 CR. Cash 807,500 (850*($950-$900))=42,500
APIC- Common Stock
Cash received (exercise price*shares) + APIC-Stock Options (FV*shares) - Par Value of Shares (par value*shares)
Offers all employees the opportunity to purchase its $2 par value common stock at a 3% discount. The employees have two weeks to elect to participate in the plan. The current market price of the stock is $30/share. Employees purchase a total of 10,000 Shares J/E if only offered to full-time salaried employees
Compensatory because not offered to all employees DR. Cash 291,000 DR. Salary Expense 9,000** CR. Common Stock 20,000 CR. APIC 280,000 **Cash: $30x97%x10,000shares **Salary Exp: $30x3%x10,000shares in compensatory, the company records the amount of discount below market price as compensation expense
Cardinal reports a beginning PBO balance of $789,000 and a beginning plan assets balance of $654,000 (fair value). The company has net actuarial gain at the beginning of the period of $83,500. The Cardinal employee base has an average remaining service life of 10 years. What is the corridor? What is the requires amortization of actuarial gains or losses in the current year?
Corridor: 789,000 * 10%= 78,900 Amort: 78,900 < 83,500 -> 83,500-78,900= 4,600. 4,600/10yr remaining service life= $460/yr DR. Actuarial Gain-OCI 460 CR. Pension Expense 460
Anchor equipment reports a beginning PBO balance of $944,000 and a beginning balance of plan assets of $852,000. The company has a net actuarial gain at the beginning of the period of $74,200. The anchor employee base has an average remaining service life of 10 years. What is the corridor? What is the required amortization of actuarial gains or losses in the current year for anchor
Corridor: 944,000 * 10% = 94,400. Corridor is based on the PBO because its balance is larger than plan assets. Amort: 94,400 > 74,200, no amortization is required (i.e. net gain/loss is within the corridor)
Employee stock option to purchase 60,000 shares of $1.20 par value common stock with exercise price $5.10/share. Market price at date of option also $5.10/share (so no intrinsic value on date of grant, option is worth zero.) 2 year vesting period, option will expire after 5 years. Est Fair value of options using Black scholes is $9.60/share. Co. estimates no forfeitures On 1/2/20, the end of the 5 yr total option period, the options are out of the money (Mkt price < exercise price). All of the options will expire unexercised
DR. APIC- Stock options 576,000 CR. APIC- Expired S.O. 576,000 We must reclassify the options from APIC-Stock options to APIC-Expired Stock Options. The contributed capital from expired options reflects the employee-provided services the company receives without providing any compensation.
Assume Cardinal industries actual return on plan assets was $75,000 recalling that the expected return was $58,860 (654,000*9%rate of return). Second, because actuarial assumptions have changes, Cardinal has to increase its obligation by $4,300 J/E for increase in obligation due to actuarial assumption changes
DR. Actuarial Loss-OCI 4,300 CR. PBO 4,300
J/E When employees exercise options
DR. Cash (exercise price * shares) DR. APIC - Stock Options (FV * shares) CR. Common Stock (plug) CR. APIC - C/S (cash received + APIC stock options - (shares*par value)
1/2/15 granted employee stock options for 100,000 shares of $1.0 par value common stock with exercise price of $25/share. Market price on 1/2/15 was also $25/share. 2 year vesting period, 5 year total option period. Estimated fair value $30/share. Estimate no forfeiture. Employees have right to sell the shares back to the company within 3 months of the exercise. Employees exercise all options on 1/2/2017
DR. Cash 2,500,000 DR. Liability for SBC 3,000,000 CR. Common Stock 100,000 CR. APIC- Common Stock 5,400,000 Cash: exercise*shares Liability for SBC: FV*shares Common Stock: par value*shares APIC-Common Stock: Cash + Liability for SBC - Par Value
1/2/15 granted employee stock options for 100,000 shares of $1.0 par value common stock with exercise price of $25/share. Market price on 1/2/15 was also $25/share. 2 year vesting period, 5 year total option period. Estimated fair value $30/share. Estimate no forfeiture. Employees have right to sell the shares back to the company within 3 months of the exercise. At 1/2/20, end of the 5 year total option period, the options are all out of the money (mkt value < exercise price). All of the options will expire unexercised
DR. Liability for SBC 3,00,000 CR. APIC- Expired S/O 3,000,000
The retirees of cardinal receive payments of $72,000 in the current year. J/E to record payment
DR. PBO 72,000 CR. Pension plan assets 72,000 Because the pension trust and not the sponsor corporation (cardinal) pays the cash to retirees, Cardinal does not need to credit cash in this transaction
Payroll Tax Entry (for employer portion of taxes)
DR. Payroll Tax Expense CR. FICA Payable CR. Medicare Payable CR. FUTA Payable CR. SUTA Payable
Cardinal industries amends its defined benefits plan, resulting in prior service costs of $55,000. The company will amortize the prior service costs on a straight line basis over five years. J/E to record amortization over each of next 5 years
DR. Pension Expense 11,000 CR. Prior Service Cost- OCI 11,000
Cardinal industries actuary determines its service cost for the current year are $167,000. Prepare the J/E
DR. Pension Expense 167,000 CR. Cash 167,000
Cardinal: Pension costs-Net income: 203,080 Prior service costs-OCI: 44,000 Actuarial Gain/Losses-OCI: (11,380) Cash (100,000) Net Pension Liability: 135,700 (Change from beginning net liability of 135,700 (789,000-654000) to ending net liability of 270,700 (PBO (1,027,700)+Plan assets 757,000)
DR. Pension Expense 203,080 DR. Prior Service cost-OCI 44,000 CR. Actuarial Gain/Loss-OCI 11,380 CR. Cash 100,000 CR. Net pension liability 135,700
Cardinal reports a beginning PBO balance of $789,000 and a beginning plan assets balance of $654,000 (fair value). The company has net actuarial gain at the beginning of the period of $83,500. The Cardinal employee base has an average remaining service life of 10 years. If the $83,500 had been a net actuarial loss
DR. Pension Expense 460 CR. Actuarial loss-OCI 460
Archer pays wages this period of $1,000,000 and has a defined contribution pension plan that requires the company contribute 5% of total wages to the plan. J/E to record pension expense
DR. Pension Expense 50,000 CR. Cash 50,000 (Wages 1,000,000*5%)
Cardinal industries has a beginning PBO balance of $789,000 and a settlement rate of 10%. Cardinal amends its defined benefit plan on 1/1 of CY. The prior service cost related to this amendment is $55,000. J/E to record interest expense on the pension obligation
DR. Pension Expense 84,400 CR. PBO 84,400 (789,000 PBO bal + 55,000 prior service cost) * 10% settlement rate
Cardinal contributes $100,000 into the fund this year. Entry to record contribution
DR. Pension Plan Assets 100,000 CR. Cash 100,000
Assume Cardinal industries actual return on plan assets was $75,000 recalling that the expected return was $58,860 (654,000*9%rate of return). Second, because actuarial assumptions have changes, Cardinal has to increase its obligation by $4,300 J/E for actual return > expected
DR. Pension Plan Assets 16,140 CR. Actuarial Gain-OCI 16,140 (Actual 75,000-Expected 58,860=16,140)
Cardinal industries has beginning pension plan assets of $654,000 and the expected rate of return is 9%. Prepare the J/E to record the expected rate of return
DR. Pension Plan Assets 58,860 CR. Pension Expense 58,860 (654,000*9%) Expected returns decrease pension expense
Cardinal industries amends its defined benefits plan, resulting in prior service costs of $55,000. The company will amortize the prior service costs on a straight line basis over five years. J/E to record change to the plan
DR. Prior Service Costs- OCI 55,000 CR. PBO 55,000
Prior Service Costs: GAAP allows 2 methods for allocating the amortization: 1.)
Determine the cost per service year by dividing the prior service cost by the number of future periods of service for each employee active at the date of the amendment who is expected to receive benefits under the plan. The amortzation each year after that is the cost per service year multiplied by the actual service years performed
Employee stock option to purchase 60,000 shares of $1.20 par value common stock with exercise price $5.10/share. Market price at date of option also $5.10/share (so no intrinsic value on date of grant, option is worth zero.) 2 year vesting period, option will expire after 5 years. Est Fair value of options using Black scholes is $9.60/share. Co. estimates no forfeitures Employees Exercise options on 1/2/17
Dr. Cash 306,000 ($5.10 exercise*60,000 shares) DR. APIC- Stock Options 576,000 CR. Common Stock 72,000 CR. APIC - C/S 810,000 APIC- C.S is the difference between the sum of cash received & the APIC- Stock options LESS the par value of the 60,000 shares (($306,000+$576,000 - (60,000*$1.2)
Payroll Entry (for employee portion of taxes)
Dr. Wage Expense CR. FICA Payable CR.Medicare payable CR. Federal I/T payable CR. State I/T payable CR. Cash
SARS:
Employee only benefits if the stock price increases. Employee is not required to purchase the shares to get the benefit.
FICA
Employees and employer contribute to plan while employee is working and then employee receives benefit upon retirement
Employee Withholding
Employers pay taxes on their wages including a portion of social security and income taxes
Stock based compensation measurement
FASB requires companies to measure options at their fair values and expense that amount over an appropriate service period.
Social security taxes are divided into 2 parts
FICA and Medicare
Zebra motors initiated a share-appreciation rights plan on 1/1/15 by granting 30,000 rights to its key executives. Executives will receive a cash payment equal to the difference between the pre-established price of $25 per share and the market price of the company's common stock on the date of exercise. 3 year vesting period, and SAR cannot be exercised before 1/1/18. Plan expires on 1/1/19. Closing mkt price 12/31/15: $29, 12/31/19: $32, 12/31/17: $28. SARS are all exercised on 1/1/18 when the market price is $28. 2016 JE
FV of SAR= (32-25)*30,000= 210,000 Vested= 2/3 Cumulative Expense to be Accrued= (210,000 *2/3)= 140,000 Expense Accrued in CY: 100,000 (40,000 was accrued last year) DR. Compensation Expense 100,000 CR. Obligation under SAR 100,000
Zebra motors initiated a share-appreciation rights plan on 1/1/15 by granting 30,000 rights to its key executives. Executives will receive a cash payment equal to the difference between the pre-established price of $25 per share and the market price of the company's common stock on the date of exercise. 3 year vesting period, and SAR cannot be exercised before 1/1/18. Plan expires on 1/1/19. Closing mkt price 12/31/15: $29, 12/31/19: $32, 12/31/17: $28. SARS are all exercised on 1/1/18 when the market price is $28. 2017 JE
FV of SARS= (28-25)*30000= 90,000 Vested= 3/3 Cumulative Expense to be Accrued= 90,000 Expense Accrued in CY: (50,000) -->(140,000 cumulated from 2015 & 2016 and we need 90,000) DR. Obligation under SAR 50,000 CR. Compensation Expense 50,000
Changes in assumptions related to the PBO:
Include retirement rates, life expectancies, turnover rates, future salary amounts. Modifying these assumptions can result in either an increase or decrease in the PBO
Offers all employees the opportunity to purchase its $2 par value common stock at a 3% discount. The employees have two weeks to elect to participate in the plan. The current market price of the stock is $30/share. Employees purchase a total of 10,000 Shares J/E on date the employees purchase shares
Non-compensatory bc offered to all employees, less than 5% discount, less than 1 mo to elect to participate Dr. Cash 291,000* CR. Common Stock 20,000 CR. APIC 271,000 *$30x97%x10,000shares
Employers defer the prior service cost in _____ and ______ it to _____ over future periods
OCI; Amortize: pension expense
Under U.S. GAPP, we accumulate gains and losses in ___ and amortize them over future periods when the accumulated unrecognized gain or losse exceeds a _______
OCI; Materiality level
Service cost is the increase in the ____ resulting from ____ of service from employees
PBO; one additional year
Service cost is measured as the ______ for one additional year of service, using ___ employees and ______ salary rates
PV of providing pension benefits; all; future estimated
At the financial statement date, the defined benefit obligations is the
PV of the benefit payments to be made after the employees retire. While the employees are working, the benefits are deferred.
Compensation arrangement
Specifies the number of options granted, the exercise price, the vesting period, and the expiration data
Option pricing models (Black-Scholes) for estimating fair value of stock options require the following estimates:
Stock price, time to expiration, exercise value, risk-free discount rate, volatility of the stock, probability that the options will vest.
Zebra motors initiated a share-appreciation rights plan on 1/1/15 by granting 30,000 rights to its key executives. Executives will receive a cash payment equal to the difference between the pre-established price of $25 per share and the market price of the company's common stock on the date of exercise. 3 year vesting period, and SAR cannot be exercised before 1/1/18. Plan expires on 1/1/19. Closing mkt price 12/31/15: $29, 12/31/19: $32, 12/31/17: $28. SARS are all exercised on 1/1/18 when the market price is $28. 2015 J/E
The FV of the SARS = (Pre est. price - Closing mkt price) x 30,000 rights. 12/15: FV per SAR $4 * 30,000= Total FV $120,000 * 1/3 vested = $40,000 cumulative expense to be accrued, $40,000 expense accrued in CY DR. Compensation Expense 40,000 CR. Obligation under SAR 40,000
The company records compensation expense and a SAR-related liability
The liability per share is measured as the fair value of the SAR, which is the difference between the stock price and the pre-established stock price
Vesting period (or Service Period)
The time the employees must remain with the company before exercising the options
Employee stock option to purchase 60,000 shares of $1.20 par value common stock with exercise price $5.10/share. Market price at date of option also $5.10/share (so no intrinsic value on date of grant, option is worth zero.) 2 year vesting period, option will expire after 5 years. Est Fair value of options using Black scholes is $9.60/share. For 2016, only 60% of employees expected to exercise options
Total Compensation Exp at FV * % of options expected to vest = Expected compensation expense (576,000*60%=345,600) Expected compensation expense * Cumulative rate of amortization = Cumulative compensation expense (345,600 * 2yrs/2yrs= 345,600) Cumulative Compensation Expense - Expense recognized in PY = Compensation Expense CY (345,600-288,000=57,600) 12/31/16: DR. Compensation Expense 57,600 CR. APIC - Stock Options 57,600
Employee stock option to purchase 60,000 shares of $1.20 par value common stock with exercise price $5.10/share. Market price at date of option also $5.10/share (so no intrinsic value on date of grant, option is worth zero.) 2 year vesting period, option will expire after 5 years. Est Fair value of options using Black scholes is $9.60/share. Co. estimates no forfeitures
Total Expense: (60,000 shares * $9.60 FV) *100% (bc no estimated forfeiture) = $576,000 Two year service period requires that expense be allocated evenly over each year ($576,000/2years) = $288,000 each year Dr. Compensation Expense 288,000 Cr. APIC- Stock Options 288,000
Companies estimate the fair value of stock options either using an option pricing model such as Black-Scholes (most common) or
a binomial or lattice pricing model (preferred by FASB but not required)
Under a restricted stock plan,
a company awards actual shares in the name of the specific employee, resulting in an allocation of restricted shares to the designated employee
ABO is considered
a minimum obligation because it only reflects current salaries and does not factor in projected increases in compensation
The corridor test used the _______ of the accumulated net gain or loss
absolute value
The PBO increases by the ________ each year
accrued interest on the obligation
After a company records the net actuarial gains and losses in OCI, it may
amortize them into pension expense over future periods.
Commonly, the company allocates the amortization over the
average remaining service life of its employee base
Vested benefit obligation
bases the defined benefit obligation on the vested benefits that accrue to current employees
vested benefits should
be accrued
In a defined contribution plan, the employees
bear the risk of loss on their pension fun assets
There cannot be amortization in the first year of operations because the
beginning balance in the AOCI would be zero
The corridor is defined as 10% of the larger of the
beginning balance of the PBO or the beginning balance of the plan assets at fair value.
Employee stock options are a form of
call options
In defined benefit plans, contributions
can vary but the benefit is fixed.
Accumulated rights permit an employee to
carry forward unused benefits to future periods
Projected benefit obligation
considered all employees, both vested and non-vested, using estimated future salary levels
In a defined contribution plan, the employer
contributes a fixed amount each period based on a formula that is typically a percentage of the employee's salary
Pension plans can be either
contributory or non-contributory
In return for exercise price, employer provides stock valiued at the
current market price (can issue new shares or treasury stock)
An employee will only exercise stock options when the
current market price of the stock exceeds the fixed exercise price.
Typically a company uses
current rates (correct approach when future rates are uncertain)
VBO is computed using
current salary levels and includes only vested benefits
The first step in measuring compensation expense from granting employee stock options is to
determine the fair value on the date of the grant
Absences due to holidays, military leave, maternity leave, and jury duty generally
do not accumulate and should not be accrued
To encourage employee loyalty and to increase incentive, many employers offer
employee stock purchase programs.
Employer deducts ______ from gross wages and remits the tax to the appropriate taxing jurisdiction
employee withholding taxes (Income taxes and portion of S.S.)
In a defined benefits plan, the
employer bears the risk of loss
Compensated absences are
employer-paid time off for vacation, illness, holidays, military service, jury duty, and maternity leave
Accumulated benefit obligation
estimates the pension obligation based on the years of service performed by all employees under the plan, both vested and non-vested, based on current salary levels
Vested benefits must be paid,
even if the plan is discontinued or the employees are terminated
Companies only amortize the
excess over the corridor.
Reporting the ____, as opposed to the ________, as part of pension expense smooths volatility in pension costs
expected rate of return; actual return
Every plan has an _________ on plan assets, which is the return based on expectations for interest, dividends, and fluctuation in the _____ of plan assets
expected return; market value
Companies include the _____ return on plan assets (instead of the ____ return on plan assets) in the __________
expected; actual; pension cost
The expected return is the beginning plan assets at
fair value multiplied by an expected rate of return
On the grant date, deferred compensations on the restricted shares is measured as the
fair value of the unrestricted shares * the number of restricted shares issued
Employee stock options are
financial instruments that give an employee the right to purchase shares of the company's stock directly from the company at a fixed price over a specified period of time
Exercise (or Strike Price)
fixed amount paid to acquire a share of stock based on the terms of the option plan
Upon exercise of stock option, the employee turns in the options and pay the
fixed cash (exercise) price to employer.
Vested rights exist whenever an employer
has the obligation to make compensation payments if it terminated the employee
Unlike FICA, Medicare does not
have a maximum wage base, so all earnings are taxable
Prior service costs ____ the liability balance
increase
The defined benefit and its related obligation _____ with additional years of service
increase
Defined benefit pensions: Companies add the _____ to the ____ in ____ and _____ the ____ by the same amount
interest cost; pensions expense; operating income; increase; PBO
Settlement rate
interest rate used to compute interest on the PBO, determined by an actuary.
The invest plan assets earn ____,____, and ____ upon sale
interest, dividends, and capital gains
The defined benefit due each year
is a deferred future payment, so it is a liability.
Companies only amortize the accumulated amount of the net actuarial gani/loss if
it exceeds a materiality level known as the corridor.
PBO is usually the
largest estimate
Defined benefit pension plans create a _____ (the PBO) computed as the ______ for the defined benefit payments
liability; PV of future cash outflows
Length of the retirement period can be based on
life expectancy or it can be specified in the employment contract
Companies usually set the exercise price equal to the
market price of the stock on the day the company grants the options
When an employee fully vests in the restricted stock plan,
no additional entries are required because the shares have already been issued.
Liabilites associates with pension plans are often
noncurrent
vesting means that the employee's right to benefits is
not contingent on any future employement with the company
Vested benefits are
not dependent of future employment
Earnings exceeding $118,500/year are
not subject to FICA
Companies test the need for amortization each year and
only at the beginning of the year
The service cost portion of pension expense is considered an
operating expense
Both employers and employees bear the responsibility for
payroll taxes
Defined benefit formula is usually a function of determined
percentage, salary level, and credits granted for the number or service years.
If the actual return < expected return
plan assets have increased less than expected Net actuarial loss
If the actual return > expected return
plan assets have increased more than expected Net actuarial gain
A defined benefits plan specifies a
predetermined amount of benefits that the employee will receive at the time of retirement.
Estimate required by PCAOB
projected benefit obligation (PBO)
The sponsor corporation ____ for the plan in order to ______ when retirement take place
provides assets; pay its obligations
Employee stock purchase plans offer employees an opportunity to
purchase the company's shares, usually at a discount and without incurring transaction costs (i.e. brokerage fees)
For a liability classified award, an employee
receives cash or some other company resource based on the value of the shares in the stock-based compensation
Accounting for defined contribution plans involves
recording the contributions as expenses and is similar to recording any kind of compensation expense
Expected returns _____ pension expense, while expected losses ______ pension expense
reduce; increase
In restricted stock plans, fewer shares are need to be an incentive which makes
restrictive shares less dilutive than stock options
The defined benefit payments begin on the _____ and extend over a ______
retirement date (RD); Designated retirement period (RP)
Prior service costs represent ______ provided to _____ on the initial adoption or ______ of an existing defined benefit pension plan
service benefits; current employees; amendment
Contributory pension plans require employees to fund _______ pension benefit costs and allow employees to make _______to voluntarily increase their retirement benefits
some or all; additional contributions
The company (referred to as the _____) sets aside funds for future pension benefits and _____ these assets to a ________ called a pension trust
sponsor company; transfers; separate legal entity
The VBO is considered a
termination basis obligation
Assume an employer amends a union pension plan to increase the defined benefit rate from 4% to 6% of final salary levels for each year of service
the 2% increase is a retroactive benefit for all prior years of service and the prior service costs represent the PV of these retroactive benefits
In a defined contribution plan, the employers annual cost is
the amount it is obligated to contribute to the pension trust.
If compensation rates change in the period of actual payment
the company debits the difference between the new higher rate and the lower accrued rate to compensation expense in the year of the payment.
After determining that a compensated absence should be accrued,
the company next determines the rate of compensation to use: current or future rates
Employee stock purchase plan is compensatory if
the company records the amount of discount below the regular market purchase as compensation expense
Non-compensatory employee stock purchase plans
the company records the issuance by employees in the same way as in the open market
In a defined contribution plan, when the employee provides services and earns the pensions
the company records the pension expense. The company may pay cash into the plan at that time or have a payable to the plan.
Non-contributory pensions plans
the employER is responsible for funding the total cost of the plan.
Stock options seek to align the interests of
the employees with the company owners and motivate the employees to work to increase the company's market value.
If the future rates are known (e.g. union contract)
the employer should use future rates in the accrual
Expiration date
the point at which the employee can no longer exercise the option
Defined benefit pension obligation: A company estimates its liability for the future benefits promised as
the present value of the defined benefits.
In a defined contribution plan the employer is not responsible for
the value of the pension fund assets
If benefits accumulate but are not vested and the probability of payments is low
then the accumulated compensated absences do not meet the definition of a liability and they are not accrued
If benefits accumulate but are not vested,
then the probability of payment must be considered.
In a defined contribution plan, if the employer makes the contribution in full each year, ________. If the company contributes more (or less) than the formula amount, then a __________ results
then there is no pension asset or liability; pension asset (liability)
Prior service costs: Because employers grant these plan amendments to both compensate and motivate employees in future periods,
they do not include this additional cost in pension expense on the date of the amendment.
Call options give the investor the right (but not the obligation)
to purchase a security at a fixed price over a specified period of time.
Restrictions create incentive for the employee
to remain employed at the company and to increase productivity to enhance the value of the shares rewarded
Forfeiture estimates allocates compensation expense
to the I/S by using a SL amortization method over the vesting period
In restricted stock plans, the company amortizes the _____________ for financial reporting purposes
total deferred compensation evenly over the vesting period
In a defined contribution plan, employees determine the ______ held in their plans and ultimately the ________ on the assets.
types of investments; rate of return
Employers pay _____ which are levied by the state and federal government to provide funding for unemployment services
unemployment taxes
Employer is responsible for paying
unemployment taxes and portion of S.S.
Prior Service Costs: GAAP allows 2 methods for allocating the amortization: 2.)
use the straight line method over the average remaining service period of the employees that are expected to receive the plan benefits
Restricted stock plan always has
value as long as the underlying shares trade at a non-zero price
Account for employee stock purchase plans depends on
whether the plans are compensatory or non-compensatory
