Chapter 17, Problem 17.19E

(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 journalize: Entry related to pension expense

Explanation of Solution

Journalize the entry related to pension expense for 2016.

Date		Account Titles and Explanation	Post Ref.	Debit	Credit
				($ in Millions)
		Pension Expense		67
		Plan Assets		45
		Amortization of Net Gain–OCI		2
		Projected Benefit Obligation (PBO)			106
		Amortization of Prior Service Cost–OCI			8
		(To record pension expense)

Table (1)

• 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 amortization reduces net gain balance and as Net Gain–OCI account is credited, it 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 and as Prior Service Cost–OCI account is debited, it is credited.

Working Notes:

Compute pension expense.

Particulars	Amount ($)
Service cost (included as PBO)	$82,000,000
Interest cost (included as PBO)	24,000,000
Expected return on the plan assets (included as plan assets)	(45,000,000)
Amortization of prior service cost	8,000,000
Amortization of net (gain) or loss–OCI	(2,000,000)
Pension expense	$67,000,000

Table (2)

Determine the amortization of net gain.

Beginning Cumulative Net Loss (Gain)	Beginning PBO	Beginning Fair Value of Plan assets	Corridor	Excess Net Loss (Gain)	Amortized Net Loss (Gain)
(Dollars in Millions)
$80	$480	$500	$50	$30	$2

Table (3)

Notes:

Higher of threshold of 10% of beginning PBO or 10% of beginning fair value of plan assets is referred to as corridor. Compute corridor value of the year.

Use the following formula to determine excess of value of beginning balance of gain (loss) over corridor:

$\begin{array}{l}\text{Excess of loss }\left(\text{gain}\right)\\ \text{over corridor}\end{array}\}\text{ = Beginning balance of loss }\left(\text{gain}\right)\text{–Corridor}$

Use the following formula to compute amortized net loss (gain) value:

$\begin{array}{l}\text{Amortized net }\\ \text{loss }\left(\text{gain}\right)\end{array}\}\text{ = }\frac{\text{Excess of loss }\left(\text{gain}\right)\text{ over corridor}}{\text{Average remaining service life of employees, 15 years}}$

(2)

To determine

To journalize: Gains and losses of 2016.

Explanation of Solution

Treatment of recognizing gains and losses related to pension obligation: The decrease or increase in pension obligation due to changes in existing and revised projected benefit obligation (PBO) is represented as gains and losses related to pension obligation. If the PBO with revised estimate is higher than PBO without revised estimate, it indicates a loss. If the PBO with revised estimate is lower than PBO without revised estimate, it indicates a gain. These gains or losses are recognized on income statement as ‘Other comprehensive income’ (OCI), and on balance sheet as ‘Accumulated other comprehensive income’ (AOCI).

Journalize the gains and losses related to pension obligation.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		PBO		10,000,000
		Gain–OCI			10,000,000
		(To record gains related to PBO)

Table (4)

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

Treatment of recognizing gains and losses related to plan assets: The difference between actual return and expected return on plan assets is represented as gains and losses related to plan assets. If the actual return is higher than expected return, it indicates a gain, and if actual return is lower than expected return, it indicates a loss. These gains or losses are recognized on income statement as ‘Other comprehensive income’ (OCI), and on balance sheet as ‘Accumulated other comprehensive income’ (AOCI).

Journalize the gains and losses related to plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Loss–OCI		8,000,000
		Plan Assets			8,000,000
		(To record loss related to plan assets)

Table (5)

• 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 ($45,000,000) over actual return ($40,000,000), assets are decreased by $5,000,000 $\left(\$45,000,000–\$40,000,000\right)$, and a decrease in assets is credited.

(3)

To determine

To journalize: The amount funded to pension funds of plan assets.

Explanation of Solution

Journalize the amount funded to pension funds of plan assets.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
		Plan Assets		70,000,000
		Cash			70,000,000
		(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 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		40,000,000
		Plan Assets			40,000,000
		(To record the pension being paid and liability reduced)

Table (7)

• 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.

(4)

To determine

To compute: The balances in the PBO, plan assets, net gain–AOCI, and prior service cost–AOCI accounts, as at December 31, 2016.

Explanation of Solution

Prepare T-account of PBO to compute the balance in PBO as at December 31, 2016.

Projected Benefit Obligation
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Gain due to changes	$10			Balance, January 1	$480
	Benefits paid	40			Service cost	82
					Interest cost	24
	Total	50			Total	586
					Ending Balance	$536

Table (8)

Thus, balance of PBO as at December 31, 2016 is $536,000,000.

Prepare T-account of plan assets to compute the balance as at December 31, 2016.

Plan Assets
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Balance, January 1	$500			Loss	$5
	Expected return	45			Benefits paid	40
	Cash contributions	70
	Total	545			Total	45
	Ending Balance	$570

Table (9)

Thus, balance of plan assets as at December 31, 2016 is $570,000,000.

Prepare T-account of net gain–AOCI to compute the balance as at December 31, 2016.

Net Gain–AOCI
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Loss on plan assets	$5			Balance, January 1	$80
	Amortized gain	2			Gain on PBO	10
	Total	7			Total	90
					Ending Balance	$83

Table (10)

Thus, balance of net gain–AOCI as at December 31, 2016 is $83,000,000.

Prepare T-account of prior service cost–AOCI to compute the balance as at December 31, 2016.

Prior Service Cost–AOCI
Date	Details	Debit		Date	Details	Credit
(Dollars in Millions)
	Balance, January 1	$48			Amortized prior service cost	$8
	Total	48			Total	8
	Ending Balance	$40

Table (11)

Thus, balance of prior service cost–AOCI as at December 31, 2016 is $40,000,000.

(5)

To determine

Funded status: The net difference of the total of projected benefit obligation (PBO) and pension plan assets are referred to as funded status. If the balance of PBO is more than plan assets, the difference is referred to as underfunded status, and reported as net pension liability on the balance sheet. If the balance of plan assets is more than PBO, the difference is referred to as overfunded status, and reported as net pension asset on the balance sheet.

To indicate: The funded status of pension plan for 2016

Explanation of Solution

The following is the funded status:

Funded status	2016
Fair value of plan assets at the end of period	$570,000,000
PBO at the end of period	536,000,000
Net pension asset	$34,000,000

Table (12)