Chapter 19, Problem 10E

1.

To determine

Calculate the amount of pension expense of Company S for 2016 and 2017.

Explanation of Solution

Pension plan: Pension plan is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.

Calculate the amount of pension expense of Company S for 2016 and 2017:

Particulars	2016	2017
	Amounts in ($)	Amounts in ($)
Service cost	$147,000	$153,000
Add: Interest cost	$125,000 (1)	$152,200 (2)
Less: Expected return on plan assets	$0	$33,000
Add: Amortization of prior service cost (3)	$62,500	$62,500
Pension expense	$334,500	$334,700

Table (1)

Working note (1):

Calculate the interest cost for 2016.

$\begin{array}{c}\text{Interest cost = Projected benefit obligtion}\times \text{Discount rate}\\ \text{=\$1,250,000}\times \frac{10}{100}\\ =\$125,000\end{array}$

Working note (2):

Calculate the interest cost for 2017.

$\begin{array}{c}\text{Interest cost = Projected benefit obligtion for 2017}\times \text{Discount rate}\\ \text{=\$1,522,000}\times \frac{10}{100}\\ =\$152,200\end{array}$

Working note (3):

Calculate the value of amortization of prior service cost for 2016 and 2017.

$\begin{array}{c}\text{Amortization of prior service cost = }\frac{\text{Projected benefit obligation}}{\text{Useful life}}\\ \text{=}\frac{\$1,250,000}{20\text{ years}}\\ =\$33,000\end{array}$

2.

To determine

Prepare the necessary journal entries of Company S for 2016 and 2017.

Explanation of Solution

Prepare journal entry to record the beginning liability for prior service cost for 2016:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
January 1, 2016	Other comprehensive income: Prior service cost		1,250,000
	Accrued/prepaid pension cost			1,250,000
	(To record the beginning liability for prior service cost for 2016)

Table (2)

• Other comprehensive income: Prior service cost is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the other comprehensive income: Prior service cost account with $1,250,000.
• Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,250,000.

Prepare journal entry to record the pension expense for 2016:

In this case, Company S has underfunded the pension contribution by $4,500$\left(\$334,500-\$330,000\right)$, hence credit the accrued/prepaid pension cost account by $4,500.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Pension expense		334,500
	Cash			330,000
	Accrued/prepaid pension cost			4,500
	(To record the pension expense incurred and its underfunded by $4,500)

Table (3)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $334,500.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $330,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $4,500.

Prepare journal entry to record the amortized prior service cost for 2016:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		62,500
	Other comprehensive income: Prior service cost			62,500
	(To record the amortization of prior service cost)

Table (4)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $62,500.
• Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $62,500.

Prepare journal entry to record the pension expense for 2017:

In this case, Company S has overvalued the pension contribution by $15,300$\left(\$350,000-\$334,700\right)$, hence debit the accrued/prepaid pension cost account by $15,300.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Pension expense		334,700
	Accrued/prepaid pension cost		15,300
	Cash			350,000
	(To record the pension expense overvalued by $15,300)

Table (5)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $334,700.
• Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $15,300.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $350,000.

Prepare journal entry to record the amortized prior service cost for 2017:

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2017	Accrued/prepaid pension cost		62,500
	Other comprehensive income: Prior service cost			62,500
	(To record the amortization of prior service cost)

Table (6)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $62,500.
• Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $62,500.

3.

To determine

Explain the manner in which company S’s pension expense would differ, if the prior service cost was vested under IAS 19.

Explanation of Solution

Explain the manner in which company S’s pension expense would differ if the prior service cost was vested under IAS 19 as follows:

When the prior service cost was vested, then Company S would consider the prior service cost of $1,250,000 as an expense under IFRS.