14–16
E14-21. Determining pension elements (LO 3, 4, 6)
Requirement 1:
Prior Service Cost Amortization
Year ended 2014 ($650,000/20) = $32,500
Requirement 4:
The projected benefit obligation at 12/31/2014:
Projected benefit obligation, 1/1/2014
$650,000
Service cost
45,000
Interest cost on beginning PBO (10% x $650,000)
65,000
Projected benefit obligation 12/31/2014
$760,000
14–17
Requirement 5:
Required pension expense journal entries for 2014:
DR OCI – prior service cost
$650,000
CR Pension asset (liability)
$650,000
DR Pension expense
$142,500
CR Pension asset (liability)
$110,000
CR OCI – prior service cost
32,500
DR Pension asset (liability)
$110,000
CR Cash
$110,000
Requirement 6:
Pension expense for 2015:
Service cost $ 49,000
Interest cost ($760,000 x 10%) 76,000
Expected return (9,900)
Amortization of prior service costs 32,500
Pension expense $147,600
Fair value of plan assets at 12/31/2015:
Fair Value Plan Assets
1/1/2015 balance 110,000
Contributions during 2015 125,000
Payments during 2015 2,000
Actual return during 2015 3,200
12/31/2015 balance $236,200
The projected benefit obligation at 12/31/2015:
$760,000
49,000
76,000
(2,000)
$883,000
14–18
The pension journal entries for 2015:
DR Pension expense
$115,100
CR Pension asset (liability)
$115,100
DR Pension expense
32,500
CR OCI – prior service cost
32,500
DR Pension asset (liability)
$125,000
CR Cash
$125,000
DR OCI – Actuarial (Gain) Loss
$6,700
CR Pension asset (liability)
$6,700
Expected of $9,900 less actual of $3,200
Pension
Asset (liability)
Balance, 1/1/2014
–
Prior service cost
650,000
Pension expense entry
110,000
Pension contribution
110,000
Balance, 12/31/2014
650,000
Pension expense entry
115,100
Pension contribution
125,000
Expected less actual return
6,700
Balance, 12/31/2015
646,800
OCI – Prior service
cost (2014)
Prior service cost
650,000
Pension expense entry
32,500
617,500
OCI – Prior service
cost (2015)
Pension expense entry
32,500
32,500
OCI – actuarial (gain)
loss (2014)
–
–
OCI – actuarial (gain)
loss (2015)
Expected less actual return
6,700
6,700
236,200
883,000
14–20
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Education.
Financial Reporting and Analysis (6th Ed.)
Chapter 14 Solutions
Pensions and Postretirement Benefits
Problems
Problems
P14–1. Determining components of pension expense (LO 3, 4, 6)
Requirement 1:
Interest cost:
Beginning balance of PBO $600,000
Minimum amortization of unrecognized pension gain:
Step (1): Determine the “corridor” amount by taking 10% of the larger of
PBO or the fair value of plan assets:
14–21
$96,000 – $72,000 = $24,000
Step (3): Amortize the value obtained in Step (2) over the average service
life of the employees:
$24,000/12 = $2,000 (minimum amortization)
14–22
P14–2. Determining expense and balance sheet amounts (journal entries) (LO
3, 4, 6)
Requirement 1:
Prior Service Cost Amortization – The average remaining service life of 10
years is the only life given in the problem, so we divide the AOCI – prior
service cost existing at December 31, 2013 by 10 as follows:
Unexpected gain $ 32,500
Requirement 4:
Pension Expense for 2014:
Service cost $ 117,400
Requirement 5:
Required Pension Journal Entries for 2014:
DR Pension expense
$146,600
CR Pension asset (liability)
$146,600
To record first three components of pension expense
DR Pension expense
$29,200
CR OCI – prior service cost
$ 29,200
To record amortization component of pension expense
DR Pension asset (liability)
$169,000
CR Cash
$ 169,000
To record contribution
DR Pension asset (liability)
$32,500
CR OCI – net actuarial (gain) loss
$ 32,500
To record the unexpected gain on plan assets
DR Pension asset (liability)
$182,100
CR OCI – net actuarial (gain) loss
$ 182,100
To record the PBO actuarial gain
14–24
Requirement 7: Check of pension asset (liability) account
PBO
$(1,450,000)
Fair value of plan assets
1,395,000
Funded Status
$ (55,000)
Pension asset (liability)
Beginning balance
$ (292,000)
Expense entry
(146,600)
Contribution entry
169,000
Asset gain entry
32,500
PBO gain entry
182,100
Ending balance
$ (55,000)
P14–3. Determining expense and balance sheet amounts (journal entries) (LO
3, 4, 6)
Requirement 1: Fair value of plan assets:
Fair value, 12/31/2013
$ 2,100,000
Actual return
129,000
Contribution
321,000
Benefit payments
(272,000)
Fair value, 12/31/2014
$ 2,278,000
Requirement 2: Prior Service Cost Amortization – The average remaining
service life of 15 years is the only life given in the problem, so we divide the
AOCI – prior service cost existing at December 31, 2013 by 15 as follows:
Year ended 2014 ($400,000 / 15)
=
$ 26,667
Year ended 2015 ($400,000 / 15)
=
26,667
14–25
Requirement 3: PBO at December 31, 2014
Beginning balance
$2,500,000
Service cost
214,000
Interest cost
250,000
Actuarial loss (gain)
33,000
Benefits paid
(272,000)
Ending balance
$2,725,000
Service cost
$ 214,000
Interest cost ($2,500,000 x 10%)
250,000
Expected return ($2,100,000 x 10%)
(210,000)
Amortization of prior service costs
26,667
$ 280,667
Requirement 5: Required Pension Journal Entries for 2014:
DR Pension expense
$254,000
CR Pension asset (liability)
$ 254,000
To record first three components
DR Pension expense
$26,667
CR OCI – prior service cost
$26,667
To record amortization component
DR Pension asset (liability)
$321,000
CR Cash
$ 321,000
To record contribution
DR OCI – net actuarial (gain) loss
$81,000*
CR Pension asset (liability)
$ 81,000
*Actual return of $129,000 less expected return
of $210,000
DR OCI – net actuarial (gain) loss
$33,000
CR Pension asset (liability)
$ 33,000
To record the PBO actuarial loss
Requirement 6: AOCI – Net actuarial (gain) loss and amortization:
Asset loss
$ 81,000
Liability loss
133,000
AOCI – net actuarial (gain) loss at 12/31/2014
$ 114,000
14–27
P14-4. Relating pension concepts to pension accounting (LO 1, 2, 3)
Problem information
Pension Plan Data
Defined benefit plan
Inception date:
1/1/2014
Benefits paid at year-end, first payment beginning one year after retirement
Discount Rate
7%
Expected rate of return
9%
Generosity
0.02
Employee Data
Start date
1/1/2011
Expected retirement date
12/31/2028
Expected retirement period:
20
years
Expected salary
Date
Level
1/1/2011
22,000
1/1/2014
27,000
1/1/2015
30,000
1/1/2028
75,000
Timeline
15 years 20 payments
1/1/2011
(Start date)
1/1/2014
12/31/2028
12/31/2048
(Plan inception)
(Retirement)
(Last benefit
payment)
14–28
Requirements 1 and 2: Service cost, interest cost, and PBO
2014
2015
Retirement benefit earned for
year of service
$1,500a
$1,500
a0.02 x 75,000
Beginning PBO
$ 0
$6,163
Service cost
6,163b
6,594c
Interest
431d
Ending PBO
$6,163
$13,188
bPV14,7% x PVOA 20,7% x $1,500
cPV13,7% x PVOA 20,7% x $1,500
dBeginning PBO of $6,193 x .07
Alternative PBO calculation
PV 13, 7% x PVOA 20,7% x $1,500 x 2 =
0.41496 x 10.59401 x $1,500 x 2
$13,188
Requirement 3: Fair value of plan assets
2014
2015
Beginning balance
$ –
$1,200
Contribution
1,200
1,200
Actual return
–
108
Ending balance
$1,200
$2,508
Plan assets less PBO
$(4,963)
$(10,680)
Requirement 4: Pension expense
2014
2015
Service Cost
$6,163
$6,594
Interest Cost
431
Less Expected Return (0.09 x $1,200)
(108)
Pension expense
$6,163
$6,917
Requirement 5: Journal Entries
2014
2015
DR Pension expense
$6,163
$6,918
CR Pension asset (liability)
$6,163
$6,917
DR Pension asset (liability)
1,200
1,200
CR Cash
1,200
1,200
Pension asset (liability) account
2014
2015
Beginning balance
$ –
$(4,963)
Prior service cost
–
Expense entry
(6,163)
$(6,917)
Contribution entry
1,200
1,200
Ending balance
$(4,963)
$(10,680)
Requirement 6 – Effect of granting prior service cost
Instead of PBO starting at zero, it begins at an initial liability of $17,279 for the three years of
past service. This initial liability must be recognized in AOCI – prior service cost and then
amortized to pension expense. Interest cost will be higher because of the initial balance in PBO.
Service cost and plan asset elements will be the same as they were above. The specific
calculations appear below.
Effect on PBO
2014
PBO at inception (PSC)
$17,279e
Service cost
6,163
Interest
1,210
PBO
$24,652
ePV15,7% x PVOA 20,7% x 3 years x $1,500
Effect on Expense
2014
Service Cost
$6,163
Interest Cost
1,210
Less Expected Return
PSC amortization
1,152
(PSC of $17,279/15 years)
Pension expense
$8,525
Effect on journal entries
2014
DR OCI – prior service cost
$17,279
CR Pension asset (liability)
$17,279
To record prior service cost at inception
DR Pension expense
$7,373
CR Pension asset (liability)
$7,373
DR Pension expense
1,152
CR OCI – prior service cost
1,152
DR Pension asset (liability)
$1,200
CR Cash
$1,200
To record contribution
Plan Assets
Funded Status
Pension asset (liability) account
Beginning balance
Prior service cost entry
Expense entry
Contribution entry