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.
Generally Accepted Accounting Principles (GAAP): These are the guidelines necessary to create accounting principles approved Financial Accounting Standards Board (FASB) for the implementation of financial information reporting in the Country U.
To compute: Pension expense of L Construction 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 L Construction for the year 2018, as per IFRS.
Particulars | Amount ($) | Amount ($) |
Service cost: | ||
Service cost | $60,000,000 | |
Past service cost | 12,000,000 | |
Service cost | $72,000,000 | |
Net interest cost (income): | ||
Net interest cost | 9,000,000 | |
Other Comprehensive Income (OCI): | ||
Re-measurement cost: | ||
Loss (gain) on plan assets | (9,000,000) | |
Net pension cost | $72,000,000 |
Table (1)
Working Notes:
Compute net interest cost.
Compute loss (gain) on plan assets.
(2)
To journalize: Entries related to net pension cost, funding, and retiree benefits paid in 2018
(2)
Explanation of Solution
Journalize the entry related to service cost of pension cost.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Service cost | 72,000,000 | ||||
DBO (2018 Service Cost) | 60,000,000 | ||||
DBO (Past Service Cost) | 12,000,000 | ||||
(To record service cost) |
Table (2)
- Service cost is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
- DBO is a liability account. Service cost increases DBO, and an increase in liability is credited.
- DBO is a liability account. Past service cost increases DBO, and an increase in liability is credited.
Journalize the entry related to net interest cost of pension cost.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Net interest cost | 9,000,000 | ||||
Plan Assets | 18,000,000 | ||||
DBO | 27,000,000 | ||||
(To record net interest cost) |
Table (3)
- Net interest cost is an expense account. Expenses decrease Equity value, and a decrease in equity is debited.
- Plan Assets is an asset account. The return on assets increases plan assets, and an increase in assets is debited.
- DBO is a liability account. Interest cost increases DBO, and an increase in liability is credited.
Working Notes:
Refer to Equation (1) for value and computation of net interest cost.
Compute expected return on plan assets.
Compute interest cost.
Journalize the entry related to loss (gain) on plan assets of pension cost.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Plan Assets | 9,000,000 | ||||
Re-measurement Gain on Plan Assets–OCI |
9,000,000 | ||||
(To record loss (gain) on plan assets) |
Table (4)
- Plan Assets is an asset account. The gain on return on assets increases plan assets, and an increase in assets is debited.
- Re-measurement Gain on Plan Assets–OCI is a gain or revenue account. Gains and revenues increase shareholders’ equity, and an increase in shareholders’ equity is credited.
Note: Refer to Equation (2) for value and computation of loss (gain) on plan assets.
Journalize the amount funded to pension funds of plan assets.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
Plan Assets | 60,000,000 | ||||
Cash | 60,000,000 | ||||
(To record plan assets being funded) |
Table (5)
- Plan Assets is an asset account. Since cash is contributed to plan assets, assets are increased, and an increase in assets is debited.
- Cash is an asset expense account. Since cash is contributed by the company, asset amount is decreased and a decrease in asset is credited.
Journalize the amount of pension paid.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
DBO | 37,000,000 | ||||
Plan Assets | 37,000,000 | ||||
(To record the pension being paid and liability reduced) |
Table (6)
- 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.
Want to see more full solutions like this?
Chapter 17 Solutions
SPICE ND LL INTERM ACCTG W/CONN+ AC
- Intermediate Accounting 105 May I please have a GAAP explanation, along with examples providing concepts? Under what conditions should a short-term obligation be excluded from current liabilities? Thank you so mucharrow_forwardV5. As FASB codification 420-10-25-12 stays “A liability for costs to terminate a contract before the end of its term shall be recognized when the entity terminates the contract in accordance with the contract terms (for example, when the entity gives written notice to the counterparty within the notification period specified by the contract or has otherwise negotiated a termination with the counterparty).” penalty for terminating early Is just a liability? Please explain. Argue about this statementarrow_forwardQ5: Research about and in your own words, describe the different EXCLUSIONS FROM GROSS INCOME: Ø Proceeds of life insurance policyØ Amount received by the insured as a return of premiumØ Gift, bequest, or descentØ Compensation for injuries or sicknessØ Income exempt under treatyØ Retirement benefits, pensions, gratuities, etc.arrow_forward
- 3330 Which of the following actions represents consideration in an insurance contract? a. paying the premium b. filing a claim c. missing the policy d. endorsing a policyarrow_forward42. A pension asset is reported when the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists. the accumulated benefit obligation exceeds the fair value of pension plan assets. pension plan assets at fair value exceed the projected benefit obligation. pension plan assets at fair value exceed the accumulated benefit obligation.arrow_forwardS1: PFRS 17 allows and insurer to change its accounting policies for insurance contract only if, as a result of its financial statements present information that is more relevant. S2: Outward Reinsurance is where the premium and commission shall be accounted for in the different accounting period original policy to which the reinsurance relates. S3: Premiurn deficiency arises when the unearned premium reserve is less than the estimated claims related expenses. a. Only S3 is incorrectb. All statements are correctc. Only S2 is correctd. Only S3 is correcte. Only S1 is incorrectf. Only S2 is incorrectg. All statements are incorrecth. Only S1 is correctarrow_forward
- TRUE OR FALSE 1. PFRS 4 SUPERSEDES PFRS17 2.PFRS 17 APPLIES TO REINSURANCE CONTRACTS3.INCOME SERVICE IS RECOGNIZED IN OTHER COMPREHENSIVE INCOME4. PFRS17 APPLIES TO INVESTMENT CONTRACTS WITH DISCRETIONARY FEATURES REGARDLESS IF THE ENTITY ALSO ISSUES INSRANCE CONRACS OR NIarrow_forwardq11 Which of the following is an arrangement by which one party promises to pay a sum of money to policyholder as protection against an adverse or unfavorable occurrence of event? a. Short Term Loans b. Fixed Deposit c. Insurance d. Investment q12 Insurance companies and brokerage houses are examples of which of the following. a. Financial instruments b. Financial institutions c. Medium of exchange d. Financial marketsarrow_forwardQU All с Question 1 of 15. Interest from which source is usually tax-exempt on the federal return? O Certificate of deposit. Corporate bond. Municipal bond. O U.S. Treasury obligations.arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education