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
International Financial Reporting Standards (IFRS): IFRS are a set of international accounting standards which are framed, approved, and published by International Accounting Standards Board (IASB) for the preparation and disclosure of international financial reports.
To compute: Net pension cost of E Distribution for the year 2018
(1)
Explanation of Solution
As per International Accounting Standard Number: 19 of IFRS, the following components are recorded as pension expense on the income statement:
- Service cost
- Past service cost (Prior service cost under GAAP)
- Net interest cost
As per International Accounting Standard Number: 19 of IFRS, the following components are recorded as pension expense on the statement of comprehensive income:
- Loss (gain) on defined benefit obligation (DBO)
- Loss (gain) on plan assets
Determine net pension cost of E Distribution for the year 2018, as per IFRS.
Particulars | Amount ($) | Amount ($) |
Service cost: | ||
Service cost | $75,000,000 | |
Past service cost | 12,000,000 | |
Service cost | $87,000,000 | |
Net interest cost (income): | ||
Net interest cost | 18,000,000 | |
Other Comprehensive Income (OCI): | ||
Re-measurement cost: | ||
Loss (gain) on DBO | (22,000,000) | |
Loss (gain) on plan assets | 10,000,000 | (12,000,000) |
Net pension cost | $93,000,000 |
Table (1)
Working Notes:
Compute net interest cost.
Compute loss (gain) on plan assets.
(2)
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
To journalize: Entries related to net pension cost, gains and losses, past service cost, funding, and retiree benefits paid in 2018
(2)
Explanation of Solution
Journalize the entry related to service cost of pension expense.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Service cost | 87,000,000 | ||||
DBO (2018 Service Cost) | 75,000,000 | ||||
DBO (Past Service Cost) | 12,000,000 | ||||
(To record service cost) |
Table (2)
- Service cost is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
- DBO is a liability account. Service cost increases DBO, and an increase in liability is credited.
- DBO is a liability account. Past service cost increases DBO, and an increase in liability is credited.
Journalize the entry related to net interest cost of pension cost.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Net interest cost | 18,000,000 | ||||
Plan Assets | 30,000,000 | ||||
DBO | 48,000,000 | ||||
(To record net interest cost) |
Table (3)
- Net interest cost is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
- Plan Assets is an asset account. The return on assets increases plan assets, and an increase in assets is debited.
- DBO is a liability account. Interest cost increases DBO, and an increase in liability is credited.
Working Notes:
Refer to Equation (1) for value and computation of net interest cost.
Compute expected return on plan assets.
Compute interest cost.
Journalize the entry related to loss (gain) on plan assets of pension cost.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Re-measurement Loss on Plan Assets–OCI | 10,000,000 | ||||
Plan Assets | 10,000,000 | ||||
(To record loss on plan assets) |
Table (4)
- Re-measurement Loss on Plan Assets–OCI is a loss or expense account. Losses and expenses decrease shareholders’ equity, and a decrease in shareholders’ equity is debited.
- Plan Assets is an asset account. The loss on return on assets decreases plan assets, and a decrease in assets is credited.
Note: Refer to Equation (2) for value and computation of loss (gain) on plan assets.
Journalize the gains and losses related to pension obligation.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Defined Benefit Obligation (DBO) | 22,000,000 | ||||
Re-measurement Gain–OCI | 22,000,000 | ||||
(To record loss related to DBO) |
Table (5)
- DBO is a liability account. Gains decrease DBO, and a decrease in liability is debited.
- Re-measurement Gain–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.
Journalize the amount funded to pension funds of plan assets.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Plan Assets | 60,000,000 | ||||
Cash | 60,000,000 | ||||
(To record plan assets being funded) |
Table (6)
- Plan Assets is an asset account. Since cash is contributed to plan assets, assets are increased, and an increase in assets is debited.
- Cash is an asset expense account. Since cash is contributed by the company, asset amount is decreased and a decrease in asset is credited.
Journalize the amount of pension paid.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
DBO | 36,000,000 | ||||
Plan Assets | 36,000,000 | ||||
(To record the pension being paid and liability reduced) |
Table (7)
- DBO is a liability account. Since the pension benefits are paid to retirees, the liability to pay decreases, and a decrease in liability is debited.
- Plan Assets is an asset account. Since cash is paid to retirees, assets are decreased, and a decrease in assets is credited.
(3)
Net pension asset or net pension liability: The net total of DBO and pension plan assets are reported as net pension asset or net pension liability. Net pension asset is reported, if the net balance is a debit. Net pension liability is reported, if the net balance is a credit.
To determine: The net pension asset (liability) at the end of 2018
(3)
Explanation of Solution
Compute net pension asset or net pension liability to be reported at the end of 2018.
Step 1: Compute DBO at the end of 2018.
Particulars | Amount ($) |
DBO at the beginning of 2018 | $480,000,000 |
Service cost | 75,000,000 |
Interest cost | 48,000,000 |
Gain or loss on DBO | (22,000,000) |
Past service cost | 12,000,000 |
Less: Retiree benefits paid | (36,000,000) |
DBO at the end of 2018 | $557,000,000 |
Table (8)
Refer to Equation (3) for value and computation of interest cost.
Step 2: Compute pension plan assets at the end 2018.
Particulars | Amount ($) |
Pension plan assets at the beginning of 2018 | $300,000,000 |
Actual return on plan assets | 20,000,000 |
Cash contributions | 60,000,000 |
Retiree benefits paid | (36,000,000) |
Pension plan assets at the end of 2018 | $344,000,000 |
Table (9)
Step 3: Compute net pension asset or net pension liability to be reported at the end of 2018.
Particulars | Amount ($) |
DBO at the end of 2018 | $557,000,000 |
Plan assets at the end of 2018 | 344,000,000 |
Net pension liability at the end of 2018 | $213,000,000 |
Table (10)
Note: Refer to Tables (8) and (9) for value and computation of both the values.
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Chapter 17 Solutions
INTERMEDIATE ACCOUNTING W/CONNECT
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