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What would be the accounting treatment for the defined contribution plan?
link to the question https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/p2int_2007_dec_q.pdf
link to the answer https://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/p2int_2007_dec_a.pdfExtract from the solution is as follows:
“The accounting for the two plans is as follows. The company does not recognise any assets or liabilities for the defined
contribution scheme but charges the contributions payable for the period ($10 million) to operating profit. The contributions paid by the employees will be part of the wages and salaries cost and when paid will reduce cash.”So in the context of double entry it would be
Cr Contribution paid by employer (cash) $10m
Dr Expense $ 10 mand for contributions paid by employees the double entry would be
Dr Salary & wages cost $10m
CR ??? (i don’t know)Hi – I don’t know! When an employee elects to make additional voluntary contributions to the company pension fund in order to increase the value of the fund attributable to that individual employee, the amount contributed will be paid into the fund (by way of deduction from the employee’s salary / wage) by the company
So, the double entry will be:
Dr Wages and salaries, Cr Cash with the Cash paid to the employee by way of normal pay
Dr Wages and salaries, Cr Defined Contribution Pension Plan Obligations with the value of the additional voluntary contributions made by employees
Dr Defined Contribution Pension Plan Assets, Cr Cash with the value of those additional voluntary contributions
The Pension Plan Assets and Obligations are now both increased by the value of the additional voluntary contributions
The Wages and Salaries expense is correctly shown as the full value of wages and salaries as though no voluntary contributions had been made, and
The Cash account has been reduced by the full amount of the wages Expense, but has been correctly accounted for as a two element payment – much of it as wages paid with the balance shown as a payment to the Pension Plan
OK?
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