Chapter 17, Problem 17.12P

(1)

To determine

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

Projected benefit obligation (PBO): This is the estimated present value of future retirement benefits, accumulated based on the future compensation levels.

To determine: The amount of pension expense for 2016 and 2017

Answer to Problem 17.12P

Compute the pension expense for 2016 and 2017.

Particulars	2016	2017
Service cost	$520,000,000	$570,000,000
Interest cost	220,000,000	256,000,000
Expected return on the plan assets	(192,000,000)	(232,800,000)
Amortization of prior service cost	40,000,000	40,000,000
Amortization of net (gain) or loss–OCI	(5,000,000)	-
Pension expense	$583,000,000	$633,200,000

Table (1)

Explanation of Solution

Working Notes:

Compute interest cost for 2016.

Step 1: Compute PBO at the end of the year 2016.

Particulars	Amount ($)
PBO at December 31, 2015	$1,800,000,000
Prior service cost	400,000,000
PBO after amendment	2,200,000,000
Interest cost	220,000,000
Service cost	520,000,000
Less: Retiree benefits paid	(380,000,000)
PBO at December 31, 2016	$2,560,000,000

Table (2)

Step 2: Compute interest cost for 2016 (Refer Table (2) for PBO value).

$\begin{array}{c}\text{Interest cost = PBO after amendment × Discount rate}\\ \text{= \$2,200,000,000×10\%}\\ \text{= \$220,000,000}\end{array}$

Compute interest cost for 2017.

Step 1: Compute PBO at the end of the year 2017 (Refer to Table (2) for beginning balance of PBO).

Particulars	Amount ($)
PBO at December 31, 2016	$2,560,000,000
Interest cost	256,000,000
Service cost	570,000,000
Less: Retiree benefits paid	(450,000,000)
PBO at December 31, 2017	$2,936,000,000

Table (3)

Step 2: Compute interest cost for 2017 (Refer Table (3) for PBO value).

$\begin{array}{c}\text{Interest cost = Beginning balance of PBO × Discount rate}\\ \text{= \$2,560,000,000×10\%}\\ \text{= \$256,000,000}\end{array}$

Compute expected return on plan assets for 2016.

Step 1: Compute pension plan assets at the end 2016.

Particulars	Amount ($)
Pension plan assets, January 1, 2016	$1,600,000,000
Actual return on plan assets	180,000,000
Cash contributions	540,000,000
Retiree benefits paid	(380,000,000)
Pension plan assets, December 31, 2016	$1,940,000,000

Table (4)

Step 2: Compute expected return on plan assets for 2016 (Refer Table (4) for plan assets value).

$\begin{array}{c}\text{Expected return on plan assets = }\left\{\begin{array}{l}\text{Beginning balance of plan assets × }\\ \text{Rate of return}\end{array}\right\}\\ \text{= \$1,600,000,000×12\%}\\ \text{= \$192,000,000}\end{array}$

Compute expected return on plan assets for 2017.

Step 1: Compute pension plan assets at the end 2017 (Refer to Table (4) for beginning balance of plan assets).

Particulars	Amount ($)
Pension plan assets, December 31, 2016	$1,940,000,000
Actual return on plan assets	210,000,000
Cash contributions	590,000,000
Retiree benefits paid	(450,000,000)
Pension plan assets, December 31, 2017	$2,290,000,000

Table (5)

Step 2: Compute expected return on plan assets for 2017 (Refer Table (5) for plan assets value).

$\begin{array}{c}\text{Expected return on plan assets = }\left\{\begin{array}{l}\text{Beginning balance of plan assets × }\\ \text{Rate of return}\end{array}\right\}\\ \text{= \$1,940,000,000×12\%}\\ \text{= \$232,800,000}\end{array}$

Compute the amortization of prior service cost.

$\begin{array}{c}\text{Amortization of Prior Service Cost = }\frac{\text{Prior Service Cost}}{\text{Number of Service Years}}\\ =\frac{\$400}{10\text{ Years}}\\ =\$40\end{array}$            

Compute the Net Gain­ – AOCI for 2016.

Particulars	Amount ($)
Net Gain – AOCI	$230,000,000
10% of $1,800  ($1,800 is Greater than $1,600)	(180,000,000)
Amount to be Amortized	$50,000,000
Divided by Number of Years	÷ 10 years
Amortization	$5,000,000

Table (6)

Compute the Net Gain­ – AOCI for 2017.

Particulars	Amount ($)
Net Gain – AOCI as at January 1, 2016	$230,000,000
Loss in 2016	(12,000,000)
Amortization 2016	(5,000,000)
Net Gain _AOCI as at January 1, 2017	$213,000,000
10% of $2,560  ($2,560 is Greater than $1,940)	(256),000,000
Amount to be amortized in 2017	$0

Table (7)

Working Notes:

Compute the amount of loss.

$\begin{array}{c}\text{Loss on Plan Assets = Actual Return }-\text{ Expected Return}\\ \text{= \$180 }-\text{ 12\% of Plan Assets}\\ \text{= \$180}-\left(\text{\$1,600}\times 12\%\right)\\ =\$180-\$192\\ =\$12\end{array}$

(2)

To determine

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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: Pension expense for 2016 and 2017

Explanation of Solution

Journalize pension expense for 2016 (Refer to Table (1) for all the values).

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
				($ in Millions)
		Pension Expense		583
		Plan Assets		192
		Amortization of Net Gain–OCI		5
		Projected Benefit Obligation (PBO)			740
		Amortization of Prior Service Cost–OCI			40
		(To record pension expense)

Table (8)

• Pension Expense 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.
• Amortization of Net Gain–OCI is a contra to Net Gain–OCI account. Since Net Gain–OCI account is credited, and as amortization reduces net gain balance, Amortization of Net Gain–OCI is debited.
• PBO is a liability account. Service cost and interest cost increase PBO, and an increase in liability is credited.
• Amortization of Prior Service Cost–OCI is a contra to Prior Service Cost–OCI account. Since amortization reduces prior service cost balance, it is credited because Prior Service Cost–OCI account is debited.

Journalize pension expense for 2017 (Refer to Table (1) for all the values).

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
				($ in Millions)
		Pension Expense		633.2
		Plan Assets		232.8
		Projected Benefit Obligation (PBO)			826.0
		Amortization of Prior Service Cost–OCI			40.0
		(To record pension expense)

Table (9)

• Pension Expense 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.
• PBO is a liability account. Service cost and interest cost increase PBO, and an increase in liability is credited.
• Amortization of Prior Service Cost–OCI is a contra to Prior Service Cost–OCI account. Since amortization reduces prior service cost balance, it is credited because Prior Service Cost–OCI account is debited.

(3)

To determine

To journalize: Gains and losses of 2016 and 2017, and new prior service cost for 2016 and 2017.

Explanation of Solution

Journalize the gains and losses related to plan assets for 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		12,000,000
		Plan Assets			12,000,000
		(To record loss related to plan assets)

Table (10)

• Loss–OCI is a loss or expense account. Losses and expenses reduce shareholders’ equity, and a reduction in shareholders’ equity is debited.
• Plan Assets is an asset account. Since loss occurred due to excess of expected return ($192,000,000) over actual return ($180,000,000), assets are decreased by $12,000,000 $\left(\$180,000,000–\$192,000,000\right)$, and a decrease in assets is credited.

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Prior Service Cost–OCI		400,000,000
		PBO			400,000,000
		(To record gains related to PBO)

Table (11)

• Prior Service Cost–OCI is an expense account. Expenses decrease shareholders’ equity, and a decrease in shareholders’ equity is debited.
• PBO is a liability account. Since liability has increased, and an increase in liability is credited, so PBO is credited.

Journalize the gains and losses related to plan assets for 2017.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		22,800,000
		Plan Assets			22,800,000
		(To record loss related to plan assets)

Table (12)

• Loss–OCI is a loss or expense account. Losses and expenses reduce shareholders’ equity, and a reduction in shareholders’ equity is debited.
• Plan Assets is an asset account. Since loss occurred due to excess of expected return ($232,800,000) over actual return ($210,000,000), assets are decreased by $22,800,000 $\left(\$210,000,000–\$232,800,000\right)$, and a decrease in assets is credited.

(4)

To determine

To journalize: Cash contributions to plan assets, and pension payments to retirees for 2016 and 2017.

Explanation of Solution

Journalize the amount funded to pension funds of plan assets for 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		540,000,000
		Cash			540,000,000
		(To record plan assets being funded)

Table (13)

• 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 account. Since cash is contributed by the company, asset amount is decreased and a decrease in asset is credited.

Journalize the amount funded to pension funds of plan assets for 2017.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		590,000,000
		Cash			590,000,000
		(To record plan assets being funded)

Table (14)

• 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 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 to retirees for 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		380,000,000
		Plan Assets			38,000,000
		(To record the pension being paid and liability reduced)

Table (15)

• PBO 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.

Journalize the amount of pension paid to retirees for 2017.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		450,000,000
		Plan Assets			45,000,000
		(To record the pension being paid and liability reduced)

Table (16)

• PBO 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.