Exercise 17–4
Requirement 1
($ in millions)
Pension expense (total)…………………………………………… 14
Requirement 2
($ in millions)
Pension expense (total)…………………………………………… 10
Requirement 3
($ in millions)
Pension expense (total)…………………………………………… 17
The amortization amounts are reported as other comprehensive income in the
statement of comprehensive income.
* Because Prior service cost—AOCI and Net loss—AOCI have debit balances, we
amortize them with a credit. We amortize a Net gain—AOCI (credit balance) with a
debit. After the amortization amounts are reported as OCI in this year’s statement of
comprehensive income, the respective AOCI amounts in the balance sheet are reduced.
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17–! Intermediate
Accounting 9e
Exercise 17–5
($ in millions)
Plan assets
Beginning of the year $600
Actual return 48
Exercise 17–6
($ in millions)
PBO:
Beginning of the year $360
Service cost ?
Exercise 17–7
($ in millions)
Plan assets
Beginning of the year $700
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17–! Intermediate
Accounting 9e
Exercise 17–8
($ in 000s)
Service cost $112
Interest cost (6% x $850) 51
The service cost component of pension expense ($112,000) is reported
in the income statement as part of the total compensation costs arising from
services rendered by the employees during the period, separate from the
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17–! Intermediate
Accounting 9e
Exercise 17–9
Under IFRS the various components of pension expense Sterling
Properties would separately report service cost (including past service
cost), net interest cost/income, and remeasurement gains and losses:
($ in 000s)
Income statement:
Statement of comprehensive income:
* Because plan assets exceed the DBO, we have net interest income rather than net interest
cost
** This solution assumes that the 6% interest rate is also the interest rate for high-quality
corporate bonds, which is the rate prescribed for determining the net interest cost/income.
Note: Using IFRS, there would be no prior service cost in AOCI and no amortization of the
net loss.
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17–! Intermediate
Accounting 9e
Exercise 17–10
Requirement 1
($ in millions)
Service cost $20
Requirement 2
Pension expense (calculated above) 24
The service cost component of pension expense ($20M) is reported in
the income statement as part of the total compensation costs arising from
services rendered by the employees during the period, separate from the
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17–! Intermediate
Accounting 9e
The following entry also would be required for actual return in excess of
the expected return, although it does not affect the pension expense or the
plan asset funding:
Plan assets 1
Gain—OCI
1
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17–! Intermediate
Accounting 9e
Exercise 17–11
Requirement 1
($ in 000s)
Service cost $310
Interest cost (7% x $2,300) 161
Requirement 2
Pension expense (calculated above) 250
Plan assets (expected return on assets) 240
The amortization amounts are reported as other comprehensive income
in the statement of comprehensive income.
The service cost component of pension expense ($310,000) is reported
in the income statement as part of the total compensation costs arising from
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17–! Intermediate
Accounting 9e
* Because Prior service cost—AOCI has a debit balances, we amortize it with a credit. We
amortize a Net gain—AOCI (credit balance) with a debit. After the two amortization amounts
are reported as OCI in this year’s statement of comprehensive income, the respective AOCI
amounts in the balance sheet are reduced.
Exercise 17–12
Requirement 1
Requirement 2
The present value of the retirement annuity at the end of 2043 is
*Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4)
Requirement 3
The PBO is the present value of the retirement benefits at the end of
*Present value of $1: n = 25, i = 7 % (from Table 2)
Requirement 4
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17–! Intermediate
Accounting 9e
*Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4)
** Present value of $1: n = 25, i = 7% (from Table 2)
Requirement 5
1.2% x 21 x $270,000 = $68,040
*Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4)
** Present value of $1: n = 24, i = 7% (from Table 2)
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17–! Intermediate
Accounting 9e
Exercise 17–12 (concluded)
Requirement 6
PBO at the end of 2019 $122,174
The change due to service cost can be verified as follows ($1 difference due to
rounding):
annual retirement benefits to discount to discount
from 2019 service to 2043 * to 2019 **
*Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4)
** Present value of $1: n = 24, i = 7% (from Table 2)
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17–! Intermediate
Accounting 9e
Exercise 17–13
Requirement 1
($ in 000s) Case 1 Case 2 Case 3
Net loss or gain $320 $330 $260
* 10% times either the PBO or plan assets (beginning of the year), whichever is larger.
Case 1 3,310 or 2,800: choose 3,310
Case 2 2,670 or 2,700: choose 2,700
Case 3 1,700 or 1,550: choose 1,700
Requirement 2
($ in 000s) Case 1 Case 2 Case 3
January 1, 2018 net loss or (gain) $320 ($330) $260
2018 loss (gain) on plan assets (11) (8) 2
Note: The balance in this account is recognized as part of accumulated other
comprehensive income in the balance sheet.
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17–! Intermediate
Accounting 9e
Exercise 17–14
In the balance sheet,
Liabilities increase by $274 million:
The PBO increases by $374 (service cost and interest cost); plan
assets increase by $100 (expected return on assets plus the gain
due to the actual return exceeding expectations). When those two
accounts are reported in the balance sheet by netting the two
together (PBO less plan assets), the net pension liability
(underfunded plan) will increase by $274 million.
Shareholders’ equity decreases by $274 million:
Retained earnings:
Retained earnings decreases by the reduction of earnings by the
$294 million expense.
Accumulated other comprehensive income:
The prior service cost—AOCI (a negative shareholders’ equity
account) decreases by the $8 million amortization.
The net loss—AOCI (a negative shareholders’ equity account)
decreases by the $2 million amortization and by the $10 million
gain—OCI.
Retained earnings ($294)
Prior service cost—AOCI 8
Net loss—AOCI 12
Shareholders’ equity $274
Journal entries (not required):
To record expense ($ in 000s)
Pension expense (given) 294
Plan assets (expected return on assets) 90
Amortization of prior service cost—OCI (current amortization) 8
Amortization of net loss—OCI (current amortization) 2
PBO ($224 service cost + $150 interest cost) 374
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17–! Intermediate
Accounting 9e
To record gain on assets……………………….
Plan assets………………………………………… 10
Gain—OCI (actual return exceeded expected return) 10
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17–! Intermediate
Accounting 9e