Concept explainers
1.
Pension expense: Pension expense is an expense to the employer paid as compensation after the completion of services performed by the employees.
Pension expense includes the following components:
- Service cost
- Interest cost
- Expected return on plan assets
- Amortization of prior service cost
- Amortization of net loss or net gain
To Calculate: The pension expense for 2018.
1.
Explanation of Solution
The following table shows the pension expense for 2018.
Particulars | Amount in millions ($) |
Service Cost | 75 |
Interest cost | 45 |
Expected return on the plan assets | (24) |
Amortization of prior service cost | 0 |
Amortization of net gain or net loss – AOCI | 0 |
Pension Expense | 96 |
Table (1)
Note: The prior service cost will not amortize as the amendment was done at the end of the year.
Therefore, the amount of pension expense is $96.
2.
To Prepare: The
2.
Explanation of Solution
Record the pension expense.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Pension expense (Table 1) | 96 | |||
Plan assets (2) | 24 | |||
Projected Benefit Obligation (3) | 120 | |||
(To record the pension expense.) |
Table (2)
Working Note:
Determine the plan assets.
Determine projected benefit obligation.
- Pension expense account is an expense and it is decreased the equity value by $96. Therefore, debit pension expense account with $96.
- A plan asset is an asset and it is increased by $24. Therefore, debit plan asset account with $24.
- Projected Benefit Obligation is a liability and it is increased by $120. Therefore, credit Projected Benefit Obligation account with $120.
Record the prior service cost – other comprehensive income.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Prior service cost – Other Comprehensive Income | 12 | |||
Projected Benefit Obligation | 12 | |||
(To record the prior service cost.) |
Table (3)
- Prior service cost – Other Comprehensive Income account is an expense and it is decreased the equity value by $12. Therefore, debit Prior service cost – Other Comprehensive Income account with $12.
- Projected Benefit Obligation is a liability and it is increased by $12. Therefore, credit Projected Benefit Obligation account with $12.
Record the gain – other comprehensive income.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Projected Benefit Obligation | 22 | |||
Gain – Other Comprehensive Income | 22 | |||
(To record the gain.) |
Table (4)
- Projected Benefit Obligation is a liability and it is decreased by $22. Therefore, debit Projected Benefit Obligation account with $22.
- Gain – Other Comprehensive Income account is an income and it is increased the equity value by $22. Therefore, credit gain – Other Comprehensive Income account with $22.
Record the loss- other comprehensive income.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Loss – Other Comprehensive Income (4) | 4 | |||
Plan assets | 4 | |||
(To record the loss.) |
Table (5)
Working Note:
Determine the loss - other comprehensive income.
- Loss – Other Comprehensive Income account is a loss and it is decreased the equity value by $4. Therefore, debit loss – Other Comprehensive Income account with $4.
- A plan asset is an asset and it is decreased by $4. Therefore, credit plan asset account with $4.
Record the contributions made.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Plan assets | 60 | |||
Cash | 60 | |||
(To record the contributions made.) |
Table (6)
- A plan asset is an asset and it is increased by $60. Therefore, debit plan asset account with $60.
- Cash is an asset and it is decreased by $60. Therefore, credit cash account with $60.
Record the retiree benefits.
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
Projected benefit obligation | 36 | |||
Plan assets | 36 | |||
(To record the retiree benefits.) |
Table (7)
- Projected Benefit Obligation is a liability and it is decreased by $36. Therefore, debit Projected Benefit Obligation account with $36.
- A plan asset is an asset and it is decreased by $36. Therefore, credit plan asset account with $36.
3.
The amount that E distribution will report in 2018 balance sheet as a net pension asset or net pension liability.
3.
Explanation of Solution
Determine the net pension liability.
Particulars | Amount ($ in millions) |
PBO balance, December 31 (Table 9) | 554 |
Less: Plan assets balance, December 31 (Table 10) | (344) |
Net pension liability | 210 |
Table (8)
Working Notes:
Determine the PBO balance as on December 31.
Particulars | Amount ($ in millions) |
PBO balance, January 1 | 480 |
Service cost | 75 |
Interest cost | 45 |
Less: Gain from change in actuarial assumption | (22) |
Prior service cost (new) | 12 |
Less: Benefits paid | (36) |
PBO balance, December 31 | 554 |
Table (9)
Determine the plan assets as on December 31.
Particulars | Amount ($ in millions) |
Plan assets balance, January 1 | 300 |
Actual return on plan assets | 20 |
Contributions 2016 | 60 |
Less: Benefits paid | (36) |
Plan assets balance, December 31 | 344 |
Table (10)
Therefore, the net pension liability is $210.
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Chapter 17 Solutions
GEN CMB INTRM ACCTG; CNCT 9E 2
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