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 2018 and 2019.

Explanation of Solution

Compute the pension expense.

Particulars	2018	2019
Service Cost	$520	$570
Interest cost	220	256
Return on plan assets	(192)	(232.80)
Amortization of Prior Service Cost	40	40
Amortization of net gain	(5)	None
Pension Expense	$583	$633.20

Table (1)

Working Notes:

Compute the balance of PBO.

Table (2)

Compute the balance of Plan Assets.

Table (3)

Compute the Expected return on Plan Assets.

2018:

$\begin{array}{c}\text{Expected Return = 12\% of Plan Assets Balance}\\ \text{= \$1,600}\times \text{12\%}\\ \text{=}\text{\$192}\end{array}$ (1)

2019:

$\begin{array}{c}\text{Expected Return = 12\% of Plan Assets Balance}\\ \text{= \$1,940}\times \text{12\%}\\ \text{=}\text{\$232}\text{.80}\end{array}$ (2)

Compute the amortization prior cost.

$\begin{array}{c}\text{Amortization of Prior Service Cost = }\frac{\text{Prior Service Cost}}{\text{Number of Service Years}}\\ =\frac{\$400}{10\text{ Years}}\\ =\$40\end{array}$ (3)

Compute the Net Gain­ – AOCI.

2018:

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

Table (4)

2019:

Particulars	Amount in Thousands
Net Gain – AOCI at 1 – 1 - 2018	$230
Loss in 2018 (Refer to Note 1)	(12)
Amortization 2018	(5)
Net Gain _AOCI at 1 – 1 - 2019	$213
10% of $2,560  ($2,560 is Greater than $1,940)	(256)
Amount to be Amortized	None

Table (5)

Compute the amount of loss.

$\begin{array}{c}\text{Loss on Plan Assets = Actual Return }-\text{ Expected Return}\\ \text{= \$180 }-\text{ 12\% of Plan Assets}\\ \text{= \$180}-\left(\text{\$1,600}\times 12\%\right)\\ =\$180-\$192\\ =\$12\end{array}$ (4)

2.

To determine

To Record: The pension expense entry for 2018 and 2019.

Explanation of Solution

Record the following journal entry for 2018.

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

Table (6)

Working Note:

Compute the PBO.

$\begin{array}{c}\text{Projected benefit obligation}=\text{Service cost}+\text{Interest cost }\\ =\text{\$520}+\text{}\text{\$220}\\ =\text{\$740}\end{array}$ (5)

Record the following journal entry for 2019:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Pension Expense		633.20
	Plan Assets (Expected Return)		232.80
	Projected Benefit Obligation			826 (6)
	Amortization of Prior Service Cost			40
	(To record the pension expense.)

Table (7)

Working Note:

Compute the PBO.

$\begin{array}{c}\text{Projected benefit obligation}=\text{Service cost}+\text{Interest cost }\\ =\text{\$570}+\text{}\text{\$256}\\ =\text{\$826}\end{array}$ (6)

3.

To determine

To Record: The gains and losses entry for 2018 and 2019 and new prior service cost.

Explanation of Solution

Record gain or loss entry for 2018.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Loss – OCI		12
	Plan Assets			12
	(To record the Loss.)

Table (8)

Record prior service cost entry for 2018.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Prior Service Cost - OCI		400
	PBO			400
	(To record the prior service cost.)

Table (9)

Record gain or loss entry for 2019.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Loss – OCI		22.80 (7)
	Plan Assets			22.80
	(To record the loss.)

Table (10)

Working Note:

Compute the amount of loss.

$\begin{array}{c}\text{Loss on Plan Assets = Actual Return }-\text{ Expected Return}\\ \text{= \$210 }-\text{ 232}\text{.8}\left(2\right)\\ =\$22.80\end{array}$ (7)

4.

To determine

To Record: The entry for cash contribution to plan assets and benefit payments to retirees for 2018 and 2019.

Explanation of Solution

Record the funding entry for 2018.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Plan assets		540
	Cash			540
	(To record the contributions made.)

Table (11)

Record the funding entry for 2019.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Plan assets		590
	Cash			590
	(To record the contributions made.)

Table (12)

Record the payment entry for 2018.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Projected Benefit Obligation		380
	Plan Assets			380
	(To record the contributions made.)

Table (13)

Record the payment entry for 2019.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Projected Benefit Obligation		450
	Plan Assets			450
	(To record the contributions made.)

Table (14)