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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Carpenter Company adopted a defined benefit pension plan for its employees on January 1, 2019. At the time of adoption, the pension contract provided for retroactive benefits for the company’s active participating employees. These retroactive benefits resulted in a prior service cost of $1, 860, 000 that created a projected benefit obligation of the same amount on that date. Carpenter decided to amortize the prior service cost by the straight-line method over the 20-year average remaining service life of the employees. The following additional information is also available for 2019 and 2020: (1) discount rate for both 2019 and 2020: 8%; (2) company contribution (funded 12/31): 2019, $350, 000; 2020, $530, 000; (3) expected long term rate of return on plan assets: 9%; (4) actual rate of return on plan assets, 10%; (5) service cost: 2019, $257, 000; 2020, $264, 000; and (6) plan assets: 1/1/2019, $0. Carpenter paid pension benefits of $30,000 each year. Carpenter uses the corridor approach to amortize gains or losses. There are no other components of Carpenter’s pension expense. Ignore any adjustment of accumulated other comprehensive income.

Required:

Prepare a pension plan worksheet that includes the calculation of Carpenter’s pension expense for 2019 and 2020, the reconciliation of the beginning and ending projected benefit obligation for 2019 and 2020, the reconciliation of the beginning and ending plan assets for 2019 and 2020, and the journal entry to record the pension expense at the end of 2019 and 2020, indicating whether each component is a debit or credit.

To determine

Prepare a pension plan worksheet for 2019 and 2020, and prepare necessary journal entries of Company C at the end of 2019 and 2020.

Explanation

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

Prepare a pension plan worksheet for 2019 and 2020:

Figure (1)

Note: Refer working note 1 for necessary calculation.

Working note (1):

Excel calculation for pension expense and accrued/prepaid pension cost.

Figure (2)

Prepare necessary journal entries of Company C at the end of 2019 and 2020 as follows:

2019:

In this case, Company C has overvalued the pension contribution by $51,200($550,000$498,800), hence debit the accrued/prepaid pension cost account by $51,200.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Pension expense 498,800 
 Accrued/prepaid pension cost 51,200 
 Cash  550,000
 (To record the pension expense and its overvalued by $550,000)   

Table (1)

  • Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $498,800.
  • Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $51,200.
  • Cash is an asset account and it is decreased. Therefore, credit the cash account with $550,000.
DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Accrued/prepaid pension cost 93,000 
 Other comprehensive income: Prior service cost  93,000
 (To record the amortization of prior service cost)   

Table (2)

  • Accrued/prepaid pension cost is an asset account and it is increased

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