ACCT567 Case Study II (Week 5)

The City of Shipley maintains an Employee Retirement Fund; a single-employer, defined benefit plan that provides annuity and disability benefits. The fund is financed by a process that makes actuarially determined contributions from the city?s General Fund and by contributions that are made by the employees. The General Fund is handling the administration of the retirement fund and it does not have any administrative expenses. The Statement of Net Assets for the Employees? Retirement Fund as of July 1, 2011 is shown below:

City of Shipley

Employees Retirement Fund

Statement of Net Assets

As of July 1, 2011

Assets

Cash $ 60,000

Accrued Interest Receivable 160,000

Investments, at fair value

Bonds 5,500,000

Common Stock 1,600,000

Total Assets $ 7,320,000

Liabilities

Accounts Payable and Accrued Expenses 430,000

Net Assets Held in Trust for Pension Benefits $ 6,890,000

The following transactions took place during the fiscal year 2012:

The interest receivable on investments was collected in cash.

Member contributions in the amount of $ 460,000 were received in cash, the city?s General Fund also contributed $ 700,000 in cash.

Annuity benefits of $ 780,000 and disability benefits of $ 200,000 were recorded as liabilities.

Accounts payable and accrued expenses in the amount of $ 820,000 were paid in cash.

Interest income of $ 320,000 and dividends in the amount of $60,000 were received in cash.

Bond Interest Income of $ 160,000 was accrued at the end of year.

Refunds of $ 150,000 were made in cash to terminated, non-vested participating employees.

Common stocks, which are carried at a fair value of $ 500,000, were sold for $472,000. The amount of the sales price of the stock plus an additional $ 360,000 was invested in stocks.

As of the end of the fiscal year, June 30, 2012, a determination has been made that the fair value of the stocks held by the pension plan had decreased by $ 60,000; the fair value of bonds had increased by $35,000.

Temporary accounts for the year were closed.

Instructions:

Record the transactions on the books of the Employees Retirement Fund.

Prepare a Statement of Changes in Net Assets for the Employees Retirement Fund for the Year Ended June 30, 2012.

Prepare a Statement of Net Assets for the Employees? Retirement Fund as of June 30, 2012.

A city council member asked you the following question: ? What are some of the differences between a defined benefit plan and a defined contribution plan? What are some of the accounting issues that the city faces when accounting for defined benefit plans as compared to a defined contribution plan?

Grading Rubric for Case Study II:

Category	Points	%	Description
Documentation & Formatting	10	20%	Worksheet will be done in Excel and will contain formulas to receive maximum credit.
Organization and Cohesiveness	15	30%	Calculations for all parts should be organized and correctly labeled.
Content	25	50%	A quality case study will have all required work completed and will be correct.
Total	50	100%	A quality project will meet or exceed all of the above requirements.

ACCT567 Case Study II (Week 5) The City of Shipley maintains an Employee Retirement Fund; a single-employer, defined benefit plan that provides annuity and disability benefits. The fund is financed by a process that makes actuarially determined contributions from the city's General Fund and by contributions that are made by the employees. The General Fund is handling the administration of the retirement fund and it does not have any administrative expenses. The Statement of Net Assets for the Employees' Retirement Fund as of July 1, 2011 is shown below: City of Shipley Employees Retirement Fund Statement of Net Assets As of July 1, 2011 Assets Cash Accrued Interest Receivable Investments, at fair value Bonds Common Stock Total Assets Liabilities Accounts Payable and Accrued Expenses Net Assets Held in Trust for Pension Benefits $ 60,000 160,000 5,500,000 1,600,000 $ 7,320,000 430,000 $ 6,890,000 The following transactions took place during the fiscal year 2012: 1. The interest receivable on investments was collected in cash. 2. Member contributions in the amount of $ 460,000 were received in cash, the city's General Fund also contributed $ 700,000 in cash. 3. Annuity benefits of $ 780,000 and disability benefits of $ 200,000 were recorded as liabilities. 4. Accounts payable and accrued expenses in the amount of $ 820,000 were paid in cash. 5. Interest income of $ 320,000 and dividends in the amount of $60,000 were received in cash. 6. Bond Interest Income of $ 160,000 was accrued at the end of year. 7. Refunds of $ 150,000 were made in cash to terminated, non-vested participating employees. 8. Common stocks, which are carried at a fair value of $ 500,000, were sold for $472,000. The amount of the sales price of the stock plus an additional $ 360,000 was invested in stocks. 9. As of the end of the fiscal year, June 30, 2012, a determination has been made that the fair value of the stocks held by the pension plan had decreased by $ 60,000; the fair value of bonds had increased by $35,000. 10. Temporary accounts for the year were closed. Instructions: a. Record the transactions on the books of the Employees Retirement Fund. b. Prepare a Statement of Changes in Net Assets for the Employees Retirement Fund for the Year Ended June 30, 2012. c. Prepare a Statement of Net Assets for the Employees' Retirement Fund as of June 30, 2012. d. A city council member asked you the following question: \" What are some of the differences between a defined benefit plan and a defined contribution plan? What are some of the accounting issues that the city faces when accounting for defined benefit plans as compared to a defined contribution plan? Grading Rubric for Case Study II: Category Documentation & Formatting Points 10 % 20% Organization and Cohesiveness 15 30% Content 25 50% Total 50 100% Description Worksheet will be done in Excel and will contain formulas to receive maximum credit. Calculations for all parts should be organized and correctly labeled. A quality case study will have all required work completed and will be correct. A quality project will meet or exceed all of the above requirements. ACCT567 Case Study II (Week 5) (A). CITY OF SHIPLEY EMPLOYEES' RETIREMENT FUND GENERAL JOURNAL Debi 1 . Credit ts s 160,000 160,000 Cash Accrued Interest Receivable Cash Additions-Contributions-Plan Members 2 . Additions-Contributions-Employer 700,000 1,400,000 700,000 Deductions-Annuity Benefits 3 . 4 . Deductions-Disability Benefits Accounts Payable and Accrued Expenses 780,000 200,000 980,000 820,000 820,000 Additions-Investment Earnings-Interest 380,000 480,000 Additions-Investment Earnings-Dividends 160,000 60,000 150,000 150,000 Accounts Payable and Accrued Expenses Cash Cash Accrued Interest Receivable 5 . 6 . Deductions-Refunds to Terminated Employees Cash Cash Common Stocks 7 . Additions-Investment Earnings-Net Increase in Fair Value of Investments 500,000 528,000 28,000 1,028,000 1,028,000 Common Stocks Cash Common Stocks Bonds 8 . Additions-Investment Earnings-Net Increase in Fair Value of Investments 35,000 60,000 25,000 Additions-Contributions-Plan Members Additions-Contributions-Employer Additions-Investment Earnings-Interest Additions-Investment Earnings-Dividends Additions-Investment Earnings-Net Increase in Fair Value of Investments 9 . 700,000 Deductions-Annuity Benefits 700,000 780,000 Deductions-Disability Benefits 480,000 200,000 Deductions-Refunds to Terminated Employees 60,000 150,000 Net Assets Held in Trust for Pension Benefits 53,000 863,000 (B). EMPLOYEES' RETIREMENT FUND STATEMENT OF NET ASSETS Assets: Cash Accrued Interest Receivable $ 210,000 Investments, at Fair Value: 160,000 Bonds 5,465,000 Stocks 2,188,000 7973000 Total Assets Liabilities: Accounts Payable and Accrued Expenses 270,000 Net Assets Held in Trust for Pension Benefits $7753000 (C). EMPLOYEES' RETIREMENT FUND Additions: Contributions: Employer $ 700,000 Member 700,000 1,400,000 Total Contributions Investment Income: $480,000 593,000 1,993,000 Interest Dividends Net Increase in Fair Value of Investments Total Investment Income Total Additions 60,000 53,000 Deductions: Annuity Benefits Disability Benefits Refunds to Terminated Employees Total Deductions Net Increase 780,000 200,000 150,000 1130,000 863,000 Net Assets Held in Trust for Pension Benefits: Beginning of Year End of Year 6,890,000 $7753000 (d) About Defined Benefit Plans A defined benefit plan identifies the specific benefit that will be payable to you at retirement. Your basic retirement benefit usually is based on a formula that takes into account factors like the number of years a participant works for the employer (years of service) and the participant's salary (e.g., average of highest three or five years of earnings). Your retirement benefit generally is provided in the form of regular payments over your lifetime beginning at what the plan designates normal retirement age, which is typically age 65. This stream of periodic payments generally is known as a pension or sometimes called an annuity. About Defined Contribution Plans A defined contribution plan specifies how much money will go into a retirement plan today. The amount typically is either a percentage of an employee's salary or a specific dollar amount. Those funds often are invested in mutual funds or annuities available inside the retirement plan. The amount you have at retirement depends on how much (fi anything) your employer contributes to the plan, how much you as the employee save in the plan, how long you leave those funds invested, and how well your investments perform inside the plan. More and more employers are replacing defined benefit plans with defined contribution plans, primarily due to the expense and longterm obligations associated with running a defined benefit plan. If you have a defined benefit plan through your employer, be sure to regularly let your employer know that you really appreciate your retirement plan; it's a benefit well worth keeping