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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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Verna Company has had a defined benefit pension plan for several years. At the end of 2019, Verna accumulated the following information: (1) service cost for 2019, $127,000; (2) projected benefit obligation, 1/1/2019, $634,000; (3) discount rate, 9%; (4) plan assets. 1/1/2019, $589,000; and (5) expected long term rate of return on plan assets, 9%. There are no other components of Verna’s pension expense. Verna had an accrued/prepaid pension cost liability at the end of 2018. Verna contributed $128,000 to the pension plan at the end of 2019.

Required:

Compute the amount of Verna’s pension expense for 2019 and prepare the related journal entry.

To determine

Calculate the amount of pension expense of Company V for 2019 and prepare necessary journal entry.

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.

Calculate the amount of pension expense of Company V for 2019:

ParticularsAmounts in ($)
Service cost$127,000
Add: Interest cost (1)$57,060
Less: Expected return on plan assets (2)$53,010
    Pension expense for 2019$131,050

Table (1)

Therefore, the pension expense of Company V for 2019 is $131,050.

Prepare journal entry to record the pension expense:

In this case, Company V has undervalued the pension contribution by $3,050($131,050$128,000), hence credit the accrued/prepaid pension cost account by $3,050.

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
December 31, 2019Pension expense 131,050 
 Cash  128,000
 

Accrued/prepaid pension cost

  3,050
 (To record the pension expense and it is undervalued by $128,000)   

Table (2)

  • Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity

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