Requirement 1: Annual pension expense
Assumptions: Discount rate = 8% and rate of return on plan assets = 10%
End of
Year
1
Annual
Salary
2
Cumulative
Salary
3
Total Vested
Pension
4
Vested
During the
Year
5
Discount
Period
6
PV Factor
7
PV of
Total Vested
Pension
8
2017 $50,000 $ 50,000 $12,500 $12,500 4 0.73503 $ 9,187.87
*Rounded
Note that the pension fund investments and earnings will be identical
earnings is not reported again.
Service Interest Return on Pension
Year Cost Cost Plan Assets Expense
2017 $ 9,187.87 – – $ 9,187.87
$52 ,475.74
Requirement 2: Funded status under 8% discount rate
End of Year 2017 2018 2019 2020
Projected benefit obligation $9,187.87 $21,830.39 $38,580.25 $60,185.19*
*Rounded
Pension Liability
(Asset) at Year-End 2017 2018 2019 2020 2021
Beginning balance – $ 712.87 $ 1,507.89 $ 1,225.50 $1,094.96
Ending balance $ 712.87 $ 1 ,507.89 $ 1 ,225.50 $ 1 ,094.96 ($ 0.00 )
Requirement 1: Annual pension expense
Assumptions: Discount rate = 12% and rate of return on plan assets = 10%
End of
Year
1
Annual
Salary
2
Cumulative
Salary
3
Total
Vested
Pension
4
Vested
During the
Year
5
Discount
Period
6
PV
Factor
7
PV of
Total Vested
Pension
8
2017 $50,000 $ 50,000 $12,500 $12,500 4 0.63552 $ 7,943.98
2021 – 260,000 65,000 – 0 1.00000 65,000.00
Service Interest Return on Pension Pension
Year Cost Cost Plan Assets Expense
2017 $ 7,943.98 – – $ 7,943.98
2021 – 6,964.29 (5,909.02) __1,055.27
$52,475.75
Requirement 2: Funded status under 12% discount assumption
End of year 2017 2018 2019 2020
Projected benefit obligation $7,943.98 $19,573.96 $35,873.72 $58,035.71
– Fair value of plan assets (8 ,475.00) (20 ,322.50) (37,354.75) (59,090.23)
Pension Liability
(Asset) at Year-End 2017 2018 2019 2020 2021
Beginning balance – ($ 531.02) ($748.54) ($1,481.03) ($1,054.52)
Requirement 3:
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14-2
The most (least) conservative approach for the purposes of income
determination is when the discount rate is less (more) than the rate of return
on the plan assets. Let us compare the pension under the three scenarios:
Pension Expense under Various
Discount Rate Assumptions
Year 8% 10% 12%
2017 $ 9,187.87 $ 8,537.67 $ 7,943.98
$52 ,475.74 $52 ,475.76 $52 ,475.75
In the first three years, the pension expense is the highest (lowest) when the
discount rate is 8% (12%). However, in the last two years, the situation
the pension fund are unaffected by the discount rate assumption used for
financial reporting purposes.) For instance, if the pension was completely
on pension plan assets are fixed in the problem, the choice of the discount
rate cannot affect the total pension expense. To see this, let us examine the
total contributions to the pension fund:
2017 2018 2019 2020 2021 Total
had been different, then the final shortfall would have been different, resulting
in a different total expense for pensions.
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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
discount rates lead to more (less) conservative income figures.
P14-9. Interpreting OPEB disclosures and making journal entries (LO14-3,
LO14-6, LO14-7)
Requirement 1:
Determining missing costs and net periodic benefit cost:
2018 2017
Rounded to nearest million $ 76,000 $ 69,000
Other Postretirement Benefit Costs
(In thousands) 2018 2017
Service cost $ 41,000 $ 38,000
Interest cost on accumulated benefit
Curtailment loss 30,000 0
Net periodic benefit cost $ 67,000 $ 37,000
Requirement 2: 2018 Journal entries
DR Benefit expense $74,000
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whole or part.
14-4
CR OCI – prior service costs
DR Retirement benefit asset (liability) $29,000
DR Retirement benefit asset (liability)
$188,00
0
Requirement 3: Balance sheet account
Beginning balance $(371,000)
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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14-5
P14-10. Amortizating actuarial (gains) losses (LO14-3, LO14-4)
Beginning of the Year For the Year End of the Year
Projected Fair Value AOCI AOCI
Benefit of Pension Higher of Corridor Net Actuarial Excess of Amortized Excess Net Actuarial
Year Obligation Plan Assets (2) or (3) 10% of (4) (Gain) Loss (6) over (5) (Gain)loss (Gain)loss (Gain) Loss
(1) (2) (3) (4) (5) (6) (7) (8) (9) (6) – (8) + (9)
2015 $450,000 $410,000 $450,000 $45,000 ($70,000) ($25,000) ($5,000) ($60,000) ($125,000)
2020 1,450,000 1,310,000 1,450,000 145,000 343,080 198,080 39,616 80,000 383,464
Note that column (5) is unsigned in the sense that the magnitude of the cumulative unrecognized gain or
loss should exceed the corridor before the amortization begins. Consequently, in calculating the excess of
increase pension expense (year 2020).
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14-6
P14-11. Interpreting pension disclosures (LO14-2, LO14-3, LO14-4,
LO14-6)
Requirements 1 and 2 – Fair value of assets and benefit
payments
($ in millions) 2017 2016
Obligation at January 1 $6,117 $5,666
Service cost 236 213
Obligation at December 31 $5 ,624 $6 ,117
Fair value of plan assets at January
1 $5,564 $5,127
Actual return on plan assets 7 847
December 31 $5 ,283 $5 ,564
2017 2016
Projected benefit obligation (5,624) (6,117)
Total
426
719
2017 2016 2015
Service cost 236 213 179
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
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Unrecognized loss 21 22 26
Net periodic benefit cost 181 185 181
Requirement 3 – Plan amendments
AOCI – Prior Service Cost
Beginning 68
Ending 138
Requirement 4 – Actuarial (gain) loss on PBO
AOCI – Actuarial (gain)
loss
Beginning 651
Ending
288
Requirement 5 – Effect of increasing the discount rate
The increase in discount rate decreased PBO. This increase was probably
Requirement 6 – Journal Entries
Pension expense 155
Pension expense 26
expense
Pension asset (liability) 100
To record plan amendment
AOCI – actuarial (gain) loss 507
To record deferred gain on PBO
Requirement 7 – Verification of balance sheet account
Pension
Asset (liability)
Balance, 1/1/2017 553
PBO actuarial gain 849
Balance, 12/31/2017 341
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sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or
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