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:
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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
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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:
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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
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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
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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)
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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
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(Rerement
(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
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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
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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)
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