Chapter 19, Problem 2E

1.

To determine

Calculate the amount of pension expense of Company R for 2016.

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 R for 2016 as follows:

Particulars	Amounts in ($)
Service cost	$105,000
Add: Interest cost on projected benefit obligation	$12,000
Less: Expected return on plan assets	$11,000
Add: Amortization of prior service cost	$2,000
Pension expense	$108,000

Table (1)

2.

To determine

Prepare necessary journal entries of Company R for 2016, if company R funds the pension plant in the amount of (a) $108,000, (b) 107,000 and (c) $112,000.

Explanation of Solution

Prepare necessary journal entries of Company R for 2016 if company R funds the pension plan in the amount of (a) $108,000, (b) 107,000 and (c) $112,000 as follows:

(a) Funding pension plan in the amount of $108,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Pension expense		108,000
	Cash			108,000
	(To record the pension expense incurred for 2016)

Table (2)

• Pension expense is a component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $108,000.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $108,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		2,000
	Other comprehensive income: Prior service cost			2,000
	(To record the amortization of prior service cost)

Table (3)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $2,000.
• 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 $2,000.

(b) Pension plan in the amount of $107,000.

In this case, Company R has undervalued the pension contribution by $1,000$\left(\$108,000-\$107,000\right)$, hence credit the accrued/prepaid pension cost account by $1,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Pension expense		108,000
	Cash			107,000
	Accrued/prepaid pension cost			1,000
	(To record the pension expense incurred and its undervalued by $107,000)

Table (4)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $108,000.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $107,000.
• Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		2,000
	Other comprehensive income: Prior service cost			2,000
	(To record the amortization of prior service cost)

Table (5)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $2,000.
• 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 $2,000.

(c) Pension plan in the amount of $112,000.

In this case, Company R has overvalued the pension contribution by $4,000$\left(\$112,000-\$108,000\right)$, hence debit the accrued/prepaid pension cost account by $4,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Pension expense		108,000
	Accrued/prepaid pension cost		4,000
	Cash			112,000
	(To record the pension expense and its overvalued by $112,000)

Table (6)

• Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $108,000.
• Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $4,000.
• Cash is an asset account and it is decreased. Therefore, credit the cash account with $112,000.

Date	Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Accrued/prepaid pension cost		2,000
	Other comprehensive income: Prior service cost			2,000
	(To record the amortization of prior service cost)

Table (7)

• Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $2,000.
• 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 $2,000.

3.

To determine

Calculate the ending balance of accumulated other comprehensive income: prior service cost account, assume that the beginning balance of the account is $60,000.

Explanation of Solution

Calculate the ending balance of accumulated other comprehensive income: prior service cost account, assume that the beginning balance of the account is $60,000 as follows:

In this case, the company has amortized the prior service cost of $2,000. Hence, the ending balances of accumulated other comprehensive income: prior service cost is $58,000 (1).

Working note (1):

Calculate the ending balance of prior service cost.

$\begin{array}{c}\text{Ending balance = Opening balance }-\text{Amortization of prior service cost}\\ \text{=\$60,000}-\$2,000\\ =\$58,000\end{array}$

4.

To determine

Calculate the amount of pension fund needed in order to report an accrued/prepaid pension cost of $5,000 at the end of 2016.

Explanation of Solution

Calculate the amount of pension fund needed in order to report an accrued/prepaid pension cost of $5,000 at the end of 2016 as follows:

Company R has reported a beginning accrued/prepaid pension cost liability of $14,000 and reported pension expense for the period of $108,000. In this case, Company R would need the pension fund of $127,000 (2) to report an accrued/prepaid pension cost assets of $5,000 at the end of the 2016.

Working note (2):

Calculate the pension fund.

$\begin{array}{c}\text{Pension fund = }\left(\begin{array}{l}\text{Pension expense +}\\ \text{Beginning accrued/prepaid pension cost liability + }\\ \text{Accrued/prepaid pension cost asset}\end{array}\right)\\ \text{=\$108,000+\$14,00}0+\$5,000\\ =\$127,000\end{array}$