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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Parkway Company adopted a defined benefit pension plan. At that time. Parkway awarded retroactive benefits to its employees, resulting in a prior service cost of $2,180,000 on that date (which it did not fund). Parkway decided to amortize this cost by the straight-line method over the 16-year average remaining service life of its active participating employees. Parkway’s actuary and funding agency have also provided the following additional information for 2019 and 2020:

Chapter 19, Problem 4P, On January 1, 2019, Parkway Company adopted a defined benefit pension plan. At that time. Parkway

* Due to the prior service cost

Parkway contributed $670,000 and $700,000 to the pension fund at the end of 2019 and 2020, respectively. There are no other components of Parkway’s pension expense. At the end of 2020, the projected benefit obligation was $3,359,800 and the fair value of the pension plan assets was $1,430,300.

Required:

  1. 1. Compute the amount of Parkway’s pension expense for 2019 and 2020.
  2. 2. Prepare all the journal entries related to Parkway’s pension plan for 2019 and 2020.
  3. 3. What is the total accrued/prepaid pension cost at the end of 2020? Is it an asset or a liability?

1.

To determine

Compute the amount of pension expense of Company P for 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.

Compute the amount of pension expense of Company P for 2019 and 2020 as follows:

Particulars20192020
Service cost$340,000$348,000
Add: Interest cost on projected benefit obligation$218,000 (1)

$273,800

(2)

Less: Expected return on plan assets$0($60,300) (4)
Add: Amortization of prior service cost$136,250(3)$136,250
    Pension expense$694,250$697,750

Table (1)

Working note (1):

Calculate the interest cost on projected benefit obligation for 2019:

Interest cost on projected benefit obligation for 2019} = (Projected benefit obligation for 2019×Discount rate)=$2,180,000×10100=$218,000

Working note (2):

Calculate the interest cost on projected benefit obligation for 2020:

Interest cost on pr

2.

To determine

Prepare necessary journal entries of Company P for 2019 and 2020.

3.

To determine

Calculate the total accrued/prepaid pension cost at the end of 2020, and identify whether it is considered as an asset or a liability.

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