Accounting for Pensions and Postretirement Benefits
20–37
Instructions
(a) Compute the amount of postretirement expense for 2015. (Show computations.)
(b) Compute the amount of the APBO at December 31, 2015.
PROBLEMS
Pr. 20-119—Measuring, recording, and reporting pension expense and liability.
Tucker, Inc. on January 1, 2015 initiated a noncontributory, defined-benefit pension plan that
grants benefits to its 100 employees for services rendered in years prior to the adoption of the
pension plan. The total expected service-years of the 100 employees who are expected to
receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the
present value of the projected benefit obligation on January 1, 2015 was $5,520,000. On
December 31, 2015 the following information was provided concerning the pension plan’s
operations for its first year.
Employer’s contribution at end of year $1,600,000
Service cost 600,000
Projected benefit obligation 6,561,600
Plan assets (at fair value) 1,600,000
Expected return on plan assets 9%
Settlement rate 8%
Instructions
(a) Compute the pension expense recognized in 2015. Assume the prior service cost is
amortized over the average remaining service life of the employees.
(b) Prepare the journal entries to reflect accounting for the company’s pension plan for the year
ended December 31, 2015.
(c) Indicate the amounts that are reported on the income statement and the balance sheet for
2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
20–38
Pr. 20-120—Measuring and recording pension expense.
Presented below is information related to the pension plan of Zimmer Inc. for the year 2015.
1. The service cost related to pension expense is $240,000 using the projected benefits
approach.
2. The projected benefit obligation and the accumulated benefit obligation at the beginning of the
year are $320,000 and $280,000, respectively. The expected return on plan assets is 9% and
the settlement rate is 10%.
Accounting for Pensions and Postretirement Benefits
20–39
Pr. 20-120 (cont.)
3. The accumulated OCI – prior service cost at the beginning of the year is $140,000. The
company has a workforce of 200 employees, all who are expected to receive benefits under
the plan. The total number of service-years is 1,000 and the service-years attributable to 2015
is 200. The company has decided to use the years–of-service method of amortization for
these costs.
4. At the beginning of the period, fair value of pension plan assets, $280,000. The company had
an Accumulated OCI (loss) at the beginning of the period of $90,000. Any amortization of
unrecognized net loss is recognized on a straight-line basis over the average remaining
service-life of the employees.
5. The contribution made to the pension fund in 2015 was $229,000.
Instructions
(a) Determine the pension expense to be reported on the income statement for 2015. (Round
all computations to nearest dollar.)
(b) Prepare the journal entry(ies) to record pension expense for 2015.
Test Bank for Intermediate Accounting, Fifteenth Edition
20–40
Pr. 20-121—Preparing a pension work sheet.
The accountant for Marlin Corporation has developed the following information for the company’s
defined-benefit pension plan for 2015:
Service cost $500,000
Actual return on plan assets 250,000
Annual contribution to the plan 920,000
Amortization of prior service cost 125,000
Benefits paid to retirees 60,000
Settlement rate 10%
Expected rate of return on plan assets 8%
The accumulated benefit obligation at December 31, 2015, amounted to $3,250,000.
Instructions
(a) Using the above information for Marlin Corporation, complete the pension work sheet for
2015. Indicate (credit) entries by parentheses. Calculated amounts should be supported.
(b) Prepare the journal entry to reflect the accounting for the company’s pension plan for the
year ending December 31, 2015.
Pr. 20-121 (cont.) Marlin Corporation
Pension Work Sheet—2015
——————————————————————————————————————————————————————————
General Journal Entries Memo Entries
—————————————————————————————————————————————————————————
Annual OCI Pension Projected
Pension Gain / Asset / Benefit Plan
Expense Cash PSC Loss Liability Obligation Assets
——————————————————————————————————————————————————————————
Bal., Dec. 31, 2014 625,000 1,250,000 (4,000,000) 2,750,000
——————————————————————————————————————————————————————————
Service Cost
——————————————————————————————————————————————————————————
Interest Cost
——————————————————————————————————————————————————————————
Actual return
——————————————————————————————————————————————————————————
Unexpected
gain/loss
——————————————————————————————————————————————————————————
Amortization
of PSC
——————————————————————————————————————————————————————————
Contributions
——————————————————————————————————————————————————————————
Benefits
——————————————————————————————————————————————————————————
Gain/loss amort.
——————————————————————————————————————————————————————————
Journal entry
for 2015
Balance, Dec. 31, 2015
Accounting for Pensions and Postretirement Benefits Page 20-39
Accounting for Pensions and Postretirement Benefits
20–41
Pr. 20-122—Amortization of prior service cost using years-of-service method.
On January 1, 2014, Solano Incorporated amended its pension plan which caused an increase of
$4,800,000 in its projected benefit obligation. The company has 400 employees who are
expected to receive benefits under the company’s defined-benefit pension plan. The personnel
department provided the following information regarding expected employee retirements:
Expected Retirements
Number of Employees On December 31
40 2014
120 2015
60 2016
160 2017
20 2018
400
The company plans to use the years-of-service method in calculating the amortization of prior
service cost as a component of pension expense.
Instructions
Prepare a schedule which shows the amount of annual prior service cost amortization that the
company will recognize as a component of pension expense from 2014 through 2018.
Test Bank for Intermediate Accounting, Fifteenth Edition
20–42
Pr. 20-123 – Pension Worksheet – Missing Amounts
The accounting staff of Elias Inc. has prepared the following pension worksheet. Unfortunately,
several entries in the worksheet are not readable. The company has asked your assistance in
completing the worksheet and completing the accounting tasks related to the pension plan for
2015.
General Journal Entries
Memo Record
Items
Annual
Pension
Expense
Cash
OCI —–
Prior
Service
Cost
OCI —
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan.
1, 2015
1,200 Cr.
4,200
3,000
Service cost
(1)
600
Interest cost
(2)
336
Actual return
(3)
430
Unexpected
gain
160
(4)
Amortization
of PSC
(5)
70
Contributions
1,200
1,200
Benefits
300
300
Liability
increase
(6)
545
Journal entry
(7)
(8)
(9)
(10)
(11)
Accumulated OCI, Dec. 31, 2014
700
0
Balance, Dec. 31, 2015
630
385
1,051
5,381
4,330
Accounting for Pensions and Postretirement Benefits
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Instructions
(a) Determine the missing amounts in the 2015 pension worksheet, indicating whether the
amounts are debits or credits.
(b) Prepare the journal entry to record 2015 pension expense for Elias Inc.
Test Bank for Intermediate Accounting, Fifteenth Edition
20–44
Pr. 20-124 – Pension Worksheet
Howard Corp. sponsors a defined-benefit pension plan for its employees. On January 1, 2015,
the following balances related to this plan.
Plan assets (fair value) $550,000
Projected benefit obligation 600,000
Pension asset/liability 50,000 Cr.
Prior service cost 75,000
OCI – Loss 65,000
As a result of the operation of the plan during 2015, the actuary provided the following additional
data at December 31, 2015.
Service cost for 2015 $ 70,000
Actual return on plan assets in 2015 45,000
Amortization of prior service cost 15,000
Contributions in 2015 115,000
Benefits paid retirees in 2015 80,000
Settlement rate 7%
Expected return rate 8%
Average remaining service life of active employees 5 years
Instructions
(a) Compute pension expense for Howard Corp. for the year 2015 by preparing a pension
worksheet.
(b) Prepare the journal entry for pension expense.
(a) Howard Corp.
Pension Worksheet—2015
General Journal Entries Memo Record
Annual
Pension
Expense
Cash
OCI—Prior
Service
Cost
OCI—
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan. 1, 2015
50,000 Cr.
600,000 Cr.
550,000 Dr.
Service cost
70,000 Dr.
70,000 Cr.
Interest cost*
42,000 Dr.
42,000 Cr.
Actual return
45,000 Cr.
45,000 Dr.
Unexpected gain**
1,000 Dr.
1,000 Cr.
Amortization of PSC
15,000 Dr.
15,000 Cr.
Amortization of loss***
500 Dr.
500 Cr.
Contributions
115,000 Cr.
115,000 Dr.
Benefits
80,000 Dr.
80,000 Cr.
Journal entry for 2015
83,500 Dr.
115,000 Cr.
15,000 Cr.
1,500 Cr.
48,000 Dr.
Accumulated OCI, Dec. 31, 2014
75,000 Dr.
65,000 Dr.
Balance, Dec. 31, 2015
60,000 Dr.
63,500 Dr.
2,000 Cr.
632,000 Cr.
630,000 Dr.
*$42,000 = $600,000 X .07.
**$1,000 = ($550,000 X .08) – $45,000.
***
Year
1/1 Projected
Benefit
Obligation
Value of 1/1
Plan Assets
10%
Corridor
Accumulated
OCI (G/L), 1/1
Minimum
Amortization of
Loss for 2015
2015
$600,000
$550,000
$60,000
$65,000
*$500****
****($65,000 – $60,000) = $5,000 ÷ 10 = $500.
Accounting for Pensions and Postretirement Benefits Page 20-45
Test Bank for Intermediate Accounting, Fifteenth Edition
20–46
Accounting for Pensions and Postretirement Benefits
20–47
IFRS QUESTIONS
True/False
1. The accounting for defined-benefit pension plans is the same under U.S. GAAP and IFRS.
2. Prior service cost is recognized on the balance sheet under both U.S. GAAP and IFRS.
3. Prior service cost is amortized into income over the expected service lives of employees
under both U.S. GAAP and IFRS.
4. Under IFRS companies may recognize actuarial gains and losses in income immediately.
5. Under U.S. GAAP companies may either recognize actuarial gains and losses in income
immediately or amortize them over the expected service lives of employees.
Multiple Choice
6. The International Accounting Standards Board has proposed changes to IFRS pension
accounting including all of the following except
a. elimination of smoothing via the corridor approach.
b. different presentation of pension costs in the income statement.
c. requiring recognition of actuarial gains and losses over the expected service lives of
employees.
d. a new category of pensions for accounting purpose – “contribution–based promises.”
7. Midland Company follows U.S. GAAP for its external financial reporting whereas Bailey
Company follows IFRS for its external financial reporting. The amount contributed by
Midland for its defined contribution plan for 2015 amounted to $55,000 and the amount
contributed by Bailey for its defined contribution plan for 2015 amounted to $76,000. The
remaining service lives of employees at both firms is estimated to be 10 years. What is the
amount of expense related to pension costs recognized by each company in its income
statement for the year ended December 31, 2015?
Midland Bailey
a. $ 5,500 $76,000
b. $55,000 $76,000
c. $55,000 $ 7,600
d. $ 5,500 $ 7,600
Test Bank for Intermediate Accounting, Fifteenth Edition
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8. Midland Company follows U.S. GAAP for its external financial reporting whereas Bailey
Company follows IFRS for its external financial reporting. Both companies have defined-
benefit pension plans. At December 31, 2015, prior to any adjusting entries, Midland
Company’s actuarial loss subject to amortization/recognition amounted to $55,000 and
Bailey Company’s actuarial loss subject to amortization/recognition amounted to $76,000.
The remaining services lives of employees at both firms is estimated to be 10 years. What
is the maximum amount of loss that could be recognized by each company in its income
statement for the year ended December 31, 2015?
Midland Bailey
a. $ 5,500 $76,000
b. $55,000 $76,000
c. $55,000 $ 7,600
d. $ 5,500 $ 7,600
9. Which of the following is true with regard to pension accounting under U.S. GAAP and
IFRS?
a. Accounting for defined-benefit pensions is typically a less important issue in the U. S.
than in other parts of the world.
b. The accounting for defined-benefit pension plans is the same under U.S. GAAP and
IFRS.
c. Prior service cost is recognized on the balance sheet under both U.S. GAAP and
IFRS.
d. Prior service cost is amortized into income over the expected service lives of
employees under both U.S. GAAP and IFRS.
10. Pension liabilities will be impacted in countries where population aging is an issue. Which
of the following countries/areas is the most rapidly aging in the developed world?
a. Japan
b. Europe
c. United States
d. All three areas are aging at the same approximate rate.
11. Midland Company follows U.S. GAAP for its external financial reporting whereas Bailey
Company follows IFRS for its external financial reporting. The remaining service lives of
employees at both firms is estimated to be 10 years. The following information is available
for each company at December 31, 2015 related to their respective defined-benefit
pension plans.
Midland Bailey
Net of pension assets and liabilities $110,000 $140,000
Prior service cost $230,000 $175,000
What is the amount of prior service cost recognized by each company in its income
statement for the year ended December 31, 2015?
Midland Bailey
a. $230,000 $175,000
b. $ 23,000 $175,000
c. $ 23,000 $ 17,500
d. $230,000 $ 17,500
Accounting for Pensions and Postretirement Benefits
20–49
12. Midland Company follows U.S. GAAP for its external financial reporting whereas Bailey
Company follows IFRS for its external financial reporting. The remaining service lives of
employees at both firms is estimated to be 10 years. The following information is available
for each company at December 31, 2015 related to their respective defined-benefit
pension plans.
Midland Bailey
Net of pension assets and liabilities $110,000 $140,000
Prior service cost $220,000 $175,000
What is the amount of Pension Asset/Liability recognized by each company in its balance
sheet at December 31, 2015?
Midland Bailey
a. $110,000 $140,000
b. $ 11,000 $140,000
c. $110,000 $ 14,000
d. $ 11,000 $ 14,000
13. Midland Company follows U.S. GAAP for its external financial reporting whereas Bailey
Company follows IFRS for its external financial reporting. The remaining service lives of
employees at both firms is estimated to be 10 years. The following information is available
for each company at December 31, 2015 related to their respective defined-benefit
pension plans.
Midland Bailey
Net of pension assets and liabilities $110,000 $140,000
Prior service cost (after amortization, if any) $230,000 $175,000
What is the amount of Prior Service Cost recognized by each company on its balance
sheet at December 31, 2015?
Midland Bailey
a. $230,000 $175,000
b. $-0- $175,000
c. $-0- $-0-
d. $230,000 $-0-
14. The IASB and the FASB are studying several issues related to accounting for pensions
including all of the following except
a. eliminating smoothing provisions.
b. requiring companies to report actual asset returns and any actuarial gains and losses
directly in the income statement.
c. requiring companies to report various components of pension expense, such as
interest cost, separately in the income statement along with other interest expense.
d. All of the above issues are under study by the IASB and the FASB.
15. Which of the following is false regarding the accounting for pensions under IFRS and U.S.
GAAP?
a. Prior service cost is recognized on the balance sheet under U.S. GAAP only.
b. Under U.S. GAAP companies must amortize actuarial gains and losses over the
expected service lives of employees.
c. Prior service cost is amortized into income over the expected service lives of
employees under U.S. GAAP only.
d. Under IFRS companies may recognize actuarial gains and losses in income
immediately.
Test Bank for Intermediate Accounting, Fifteenth Edition
20–50
Short Answer
16. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for pensions.
17. Briefly discuss the IASB/FASB convergence efforts in the area of postretirement-benefit
accounting.