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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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Farber Company adopted a defined benefit pension plan on January 1, 2019, at which time it awarded retroactive benefits to its employees. This prior service cost amounted to $200,000, which the company did not hind. Farber planned to amortize this prior service cost in the amount of $10,000 per year. Farber determined its pension expense (which included the prior service cost amortization) to be $75,000 for 2016, of which the company funded $74,000. At the end of 2019, the fair value of the pension plan assets was $74,000 and Farber’s projected benefit obligation was $265, 000.

Required:

Prepare all the journal entries related to Farber’s pension plan for 2019. Include a brief explanation for each journal entry.

To determine

Prepare necessary journal entries of Company F for 2019.

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 record the beginning liability for prior service cost for 2019:

DateAccounts Title and ExplanationPost Ref.Debit ($)Credit ($)
2019Other comprehensive income: Prior service cost 200,000 
 Accrued/prepaid pension cost  200,000
 (To record the beginning liability for prior service cost for 2016)   

Table (1)

  • Other comprehensive income: Prior service cost is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the other comprehensive income: Prior service cost account with $200,000.
  • Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $200,000.

Prepare journal entry to record the pension expense for 2019:

In this case, Company F has underfunded the pension contribution by $1,000($75,000$74,000), hence credit the accrued/prepaid pension cost account by $1,000.

DateAccounts Title and ExplanationPost Ref

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