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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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At the end of the current year, Chelsey Company has a projected benefit obligation of $600,000 for its pension plan, and the fair value of its pension plan assets is $580,000. Chelsey has a credit balance of $32,000 in its Accrued/Prepaid Pension Cost account. Prepare the journal entry to adjust its Accrued/Prepaid Pension Cost account. Assume that the difference between the projected benefit obligation and the fair value of the pension plan assets is due to the actual return on plan assets being different from the expected return on plan assets. Indicate why and where (and the amount) Chelsey would report its Accrued/Prepaid Pension Cost.

To determine

Prepare journal entry to adjust the accrued/prepaid pension cost and explain the manner in which company would report the accrued/prepaid pension cost.

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 journal entry to adjust the accrued/prepaid pension cost and explain the manner in which company would report the accrued/prepaid pension cost as follows:

In this case, Company C has underfunded the pension contribution by $20,000($600,000$580,000), hence the accrued pension cost of $20,000 is reported as a liability on balance sheet.

Company C has a credit balance of $32,000 which is more than the $20,000. Hence, company C should adjust the difference amount of $12,000 ($32,000$20,000) in order to reduce the credit balance of the accrued/prepaid pension cost account by $20,000

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