Chapter 17, Problem 17.16P

(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

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 determine: The pension expense for 2016 and record the respective pension related entries

Answer to Problem 17.16P

Compute the pension expense for 2016.

Particulars	Amount ($)
Service cost	$48,000,000
Interest cost	24,000,000
Expected return on the plan assets	(20,000,000)
Amortization of prior service cost	4,000,000
Amortization of net (gain) or loss–OCI	1,000,000
Pension expense	$57,000,000

Table (1)

Explanation of Solution

Working Note:

Compute expected return on plan assets.

$\begin{array}{c}\text{Expected Return = 10\% of Beginning Plan Assets Balance}\\ \text{= \$200}\times \text{10\%}\\ \text{=}\text{\$20}\end{array}$                                    

Compute the amortization of Net Loss – AOCI.

Particulars	Amount ($)
Net Loss – AOCI (Previous losses exceeded previous gains)	$40,000,000
10% of $300  ($300 is Greater than $200)	(30,000,000)
Amount to be Amortized	$10,000,000
Divided by Number of Years	÷ 10 years
Amortization of net loss	$1,000,000

Table (2)

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		57
		Plan Assets		20
		Projected Benefit Obligation (PBO)			72
		Amortization of Prior Service Cost–OCI			4
		Amortization of Net Loss–OCI			1
		(To record pension expense)

Table (3)

• 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.
• Amortization of Net Loss–OCI is a contra to Net Loss–OCI account. Since amortization reduces net loss balance, it is credited because Net Loss–OCI account is debited.

Journalize the amount funded to pension funds of plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		45,000,000
		Cash			45,000,000
		(To record plan assets being funded)

Table (4)

• 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.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		20,000,000
		Plan Assets			20,000,000
		(To record the pension being paid and liability reduced)

Table (5)

• 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.

(2)

To determine

To journalize: Gains and losses of 2016.

Explanation of Solution

Journalize the gains and losses related to plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		5,000,000
		Plan Assets			5,000,000
		(To record loss related to plan assets)

Table (6)

• 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 ($20,000,000) over actual return ($15,000,000), assets are decreased by $5,000,000 $\left(\$15,000,000–\$20,000,000\right)$, and a decrease in assets is credited.

Journalize the gain – other comprehensive income. 

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Projected Benefit Obligation		2,000,000
		Gain – OCI			2,000,000
		(To record gains related to PBO)

Table (7)

• PBO is a liability account. Since liability has decreased, and a decrease in liability is debited, so PBO is debited.
• Gain–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.

(3)

To determine

To prepare: Pension spreadsheet for L Cable for 2016.

Explanation of Solution

Prepare pension spreadsheet for L Cable for 2016.

Figure (1)

(4)

To determine

The pension expense for 2017 and record the respective pension related entries.

Answer to Problem 17.16P

Compute the pension expense for 2017.

Particulars	Amount ($)
Service cost	$38,000,000
Interest cost	28,000,000
Expected return on the plan assets	(24,000,000)
Amortization of prior service cost	4,000,000
Amortization of net (gain) or loss–OCI	700,000
Pension expense	$46,700,000

Table (8)

Explanation of Solution

Working Note:

Compute the expected return on plan assets.

$\begin{array}{c}\text{Expected Return = 10\% of Plan Assets Balance}\\ \text{= \$240}\times \text{10\%}\\ \text{=}\text{\$24}\end{array}$                                    

Compute the amortization of Net Loss – AOCI.

Particulars	Amount ($)
Net Loss – AOCI (Previous losses exceeded previous gains)	$42,000,000
10% of $350  ($350 is Greater than $240)	(35,000,000)
Amount to be Amortized	$7,000,000
Divided by Number of Years	÷ 10 years
Amortization	$700,000

Table (9)

Journalize pension expense for 2017 (Refer to Table (8) for all the values).

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
				($ in Millions)
		Pension Expense		46.7
		Plan Assets		24.0
		Projected Benefit Obligation (PBO)			66.0
		Amortization of Prior Service Cost–OCI			0.7
		Amortization of Net Loss–OCI			4.0
		(To record pension expense)

Table (10)

• 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.
• Amortization of Net Loss–OCI is a contra to Net Loss–OCI account. Since amortization reduces net loss balance, it is credited because Net Loss–OCI account is debited.

Journalize the amount funded to pension funds of plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		30,000,000
		Cash			30,000,000
		(To record plan assets being funded)

Table (11)

• 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.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		16,000,000
		Plan Assets			16,000,000
		(To record the pension being paid and liability reduced)

Table (12)

• 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.

(5)

To determine

To journalize: Gains and losses of 2017.

Explanation of Solution

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		5,000,000
		PBO			5,000,000
		(To record gains related to PBO)

Table (13)

• Loss–OCI is a loss or expense account. Losses and expenses reduce shareholders’ equity, and a reduction 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.

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

Table (14)

• Plan Assets is an asset account. Since gain occurred due to excess of actual return ($36,000,000) over expected return ($24,000,000), assets are increased by $12,000,000 $\left(\$36,000,000–\$24,000,000\right)$, and a decrease in assets is credited.
• Gain–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.

(6)

To determine

To compute: The balances in net loss–AOCI, and prior service cost–AOCI accounts, as at December 31, 2017.

Explanation of Solution

Prepare T-account of net loss–AOCI to compute the balance as at December 31, 2017.

Net Loss–AOCI
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Balance, January 1	$42.0			New gain	$12.0
	New loss	5.0			Amortized loss in 2017	0.7
	Total	47.0			Total	12.7
	Ending Balance	$34.3

Table (15)

Thus, balance of net loss–AOCI as at December 31, 2017 is $34,300,000.

Prepare T-account of prior service cost–AOCI to compute the balance as at December 31, 2017.

Prior Service Cost–AOCI
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Balance, January 1	$28			Amortized prior service cost	$4
	Total	28			Total	4
	Ending Balance	$24

Table (16)

Thus, balance of prior service cost–AOCI as at December 31, 2017 is $24,000,000.

(7)

To determine

To prepare: Pension spreadsheet for L Cable for 2017.

Explanation of Solution

Prepare pension spreadsheet for L Cable for 2017.

Figure (2)