Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Financial Reporting and Analysis (7th Ed.)
Chapter 14 Solutions
Pensions and Postretirement Benefits
Problems
Problems
P14-1. Determining components of pension expense (LO14-3, LO14-4,
LO14-6)
Requirement 1: Interest cost
Beginning balance of PBO $600,000
Requirement 2: Expected dollar return on plan assets
Beginning balance of fair value of plan assets $720,000
Requirement 3: Actual return on plan assets
Fair value of plan assets
1/1/17 balance $720,000
Actual return on plan assets = $825,000 - $720,000 + $0 - $0 =
$105,000
Requirement 4: 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:
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-1
Step (3): Amortize the value obtained in Step (2) over the
Requirement 5: Recognized prior service costs
This calculation assumes that the plan amendment was made at
12/31/2016. No separate average service life is provided for the
Requirement 6: Balance in AOCI – Net actuarial (gain) loss
12/31/2017
Information needed to compute the plan assets effects come from
PBO actuarial loss (plug) 172,000
December 31, 2017 910,000
The $172,000 is a loss because we need to increase the PBO to
December 31, 2017 balance is determined as follows:
AOCI - net actuarial
(gain= Cr.) loss = Dr.
January 1, 2017 $ 96,000
Amortization (Req. 4) $ 2,000
December 31, 2017 $45,000
P14-2. Determining expense and balance sheet amounts (journal
entries) (LO14-3, LO14-4, LO14-6)
Note that this problem distinguishes between fair value of plan
assets and market-related value. See the chapter discussion
related to GE pensions.
Requirement 1:
Prior Service Cost Amortization:
Requirement 2:
Actual Return on Plan Assets:
Fair Value Plan Assets
1/01/2017 balance 1,085,000
Actual return equals $ 141,000
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-3
Requirement 3:
Unexpected Gain for 2017:
Requirement 4:
Pension Expense for 2017:
$ 168 ,700
Requirement 5:
Required Pension Journal Entries for 2017:
DR Pension expense $110,300
To record amortization component of pension expense
To record the unexpected gain on plan assets
DR Pension asset (liability) $113,250
CR OCI – net actuarial (gain) loss $ 113,250
Requirement 6:
AOCI – net actuarial (gains) and losses:
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-4
AOCI - net actuarial (gain) loss at 12/31/2017 $ (178 ,300)
Amortization of Unrecognized Gains—Corridor Approach:
Market Related Gain Amount
Year PBO Value of Plan
Assets Loss (Gain) Not in
MRV
Subject to
Amort
*Fair value of $1,395,000 less Market related value of $1,369,000
Amount outside corridor $(7,300)
Requirement 7: Check of pension asset (liability) account
PBO $(1,450,000)
Pension asset (liability)
Asset gain entry 65,050
P14-3. Determining expense and balance sheet amounts (journal
entries) (LO14-3, LO14-4, LO14-6)
Note that this problem distinguishes between fair value of plan
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-5
Requirement 1: Fair value of plan assets:
Fair value, 12/31/2016 $ 2,100,000
Fair value, 12/31/2017 $ 2,278,000
Requirement 2: Prior Service Cost Amortization – The average
Year ended 2017 ($400,000 / 15) = $ 26,667
Requirement 3: PBO at December 31, 2017
Beginning balance $2,500,000
Service cost 214,000
Ending balance $2,725,000
Requirement 4: Compute pension expense for 2017:
Service cost $ 214,000
Amortization of prior service costs 26,667
$ 280,667
Requirement 5: Required Pension Journal Entries for 2017:
DR Pension expense $254,000
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-6
DR Pension expense $26,667
CR Cash $ 321,000
To record contribution
of $210,000
DR OCI – net actuarial (gain) loss $33,000
Requirement 6: AOCI – Net actuarial (gain) loss and amortization:
Asset loss $ 81,000
Amortization of Unrecognized Gains—Corridor Approach:
Market Related Loss Amount
Year PBO Value of Plan
Assets Net Loss (Gain) Not in
MRV
Subject to
Amort
*Fair value of $2,278,000 less Market related value of $2,342,800.
2018 calculation
Requirement 7: Check of pension asset (liability) account
PBO $(2,725,000)
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-7
Pension asset (liability)
PBO loss entry (33,000)
Ending balance $(447,000)
P14-4. Relating pension concepts to pension accounting (LO14-1,
LO14-2, LO14-3)
Problem information
Pension Plan Data
Defined benefit plan
Inception date: 1/1/2017
Generosity 0.02
Employee Data
Start date 1/1/2014
1 75,000
Timeline
1/1/201
7 12/31/2031 12/31/2051
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-8
(Rerement
(Start
date)
Requirements 1 and 2: Service cost, interest cost, and PBO
2017 2018
Retirement benefit earned for
year of service $1,500a$1,500
cPV13,7% x PVOA 20,7% x $1,500
dBeginning PBO of $6,163 x .07
Alternative PBO calculation
Requirement 3 and 4: Fair value of plan assets and funded status
2017 2018
Beginning balance $ - $1,200
Funded status (Plan assets less PBO) $(4,963) $(10,680)
Requirement 5: Pension expense
2017 2018
Service Cost $6,163 $6,594
Pension expense $6,163 $6,917
Requirement 6: Journal Entries
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-9
2017 2018
Pension asset (liability) account 2017 2018
Beginning balance $ - $(4,963)
Ending balance $(4,963) $(10,680)
Requirement 7 - 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
calculations appear below.
Effect on PBO
2017
PBO at inception (PSC) $17,279e
ePV15,7% x PVOA 20,7% x 3 years x $1,500
Effect on Expense
2017
Service Cost $6,163
Pension expense $8,525
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-10
Effect on journal entries
2017
DR OCI - prior service cost $17,279
CR Pension asset (liability) $17,279
CR OCI - prior service cost 1,152
To record pension expense for the year
Funded Status
PBO $24,652
Check on Funded Status
Pension asset (liability) account
Contribution entry 1,200
$(23,452)
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
posted on a website, in whole or part. 14-11
