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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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Lane Company was incorporated in 2004. Because it had become successful, Lane established a defined benefit pension plan for its employees on January 1, 2019. Due to the loyalty of its employees, Lane granted retroactive benefits to them. These retroactive benefits resulted in $1,240,000 of prior service cost on that date. Line decided to amortize this cost using the years-of-future-service method. Lane’s actuary and funding agency have provided the following additional information for 2019 and 2020:

Chapter 19, Problem 5P, Lane Company was incorporated in 2004. Because it had become successful, Lane established a defined

Lane contributed $690,000 and $660,000 to the pension fund at the end of 2019 and 2020, respectively. No retirement benefits were paid in 2019 or 2020. There are no other components of Lane’s pension expense. At the end of 2020, the projected benefit obligation was $2,452,914 and the fair value of the pension plan assets was $1,412,100.

Required:

  1. 1. Compute the amount of Lane’s pension expense for 2019 and 2020.
  2. 2. Prepare all the journal entries related to line’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?
  4. 4. Prepare a schedule that reconciles the beginning and ending amounts of the projected benefit obligation for 2020.

1.

To determine

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

Particulars20192020
Service cost$463,000$475,000
Add: Interest cost on projected benefit obligation$111,600 (1)

$163,314

(2)

Less: Expected return on plan assets$0($62,100) (3)
Add: Amortization of prior service cost$96,000 (4)$92,000 (5)
    Pension expense$670,600$668,214

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)=$1,240,000×9100=$111,600

Working note (2):

Calculate the interest cost on projected benefit obligation for 2020:

Interest cost on projected benefit obligation for 2020} = (Projected benefit obligation for 2020×Discount rate)=$1,814,600×9

2.

To determine

Prepare necessary journal entries of Company L 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.

4.

To determine

Prepare a schedule that portrait the beginning and ending reconciliation amounts of the projected benefit obligation for 2020.

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