CHAPTER 20
Accounting for Pensions and Postretirement Benefits
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Basic definitions and
concepts related to
pension plans.
1, 2, 3, 4,
5, 6, 7,
8, 9, 12,
24, 30
16
1, 2, 3,
4, 5, 7
2. Worksheet preparation.
3
3, 4, 7, 10,
14, 15, 18
1, 2, 4, 7, 8, 9,
10, 11, 12
3. Income statement
recognition, computation
of pension expense.
9, 10, 11,
13, 16, 17
1, 2, 4
1, 2, 3, 6,
11, 13, 14,
15, 16,
17, 18
1, 2, 3, 4, 5,
6, 9, 11, 12
4, 5
4. Balance sheet recognition,
computation of pension
15, 19, 20,
22, 23
6, 10
3, 9, 11, 12,
13, 14
1, 2, 3, 4,
5, 6, 7, 8,
9, 11, 12
2, 5, 7
5. Corridor calculation.
18
7
8, 13, 14,
16, 17, 18
2, 3, 5, 6, 7,
8, 11, 12
3, 4, 5, 6
6. Prior service cost.
12, 13, 20
5, 6, 8
1, 2, 3, 5,
9, 11, 12,
13, 14
1, 2, 3, 4,
6, 7, 8, 9,
11, 12
1, 4
7. Gains and losses.
14, 17,
21, 22
7, 9
8, 9, 13, 14,
16, 17
1, 2, 3, 4, 5, 6,
7, 8, 9, 11, 12
4, 5, 6
9, 11, 12
11, 12
*10. Postretirement benefits.
26, 27,
28, 29
19, 20, 21,
22, 23, 24
13, 14
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts for
Analysis
1. Understand the
fundamentals of
pension accounting.
1, 2,
1, 2, 3, 4, 6,
7, 10, 11,
12, 13, 14,
15, 17, 18
1, 2, 3, 4, 8,
9, 10,11, 12
CA20-1,
CA20-2 CA20-
3, CA20-4
2. Use a worksheet for
plan entries.
3, 4
1, 2, 3, 4, 7,
10, 11. 12,
13,
14, 15, 18
1, 2, 3, 4, 5,
7, 8, 9, 10,
11, 12
4. Explain the accounting
and amortization for
unexpected gains and
losses.
7
8, 10, 11,
12, 13, 14,
16, 17, 18
1, 2, 3, 4,
5, 6, 7, 8, 9,
10, 11, 12
5. Describe the
requirements for
reporting pension
plans in financial
statements.
8, 9
9, 11,12, 15,
17,
2, 3, 8, 9, 11,
12
CA20-5
pensions to accounting
for other
postretirement
benefits.
19, 20, 21,
22, 23, 24
13, 14
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E20.1
Pension expense, journal entries.
Simple
15–20
E20.2
Computation of pension expense.
Simple
10–15
E20.3
Preparation of pension worksheet.
Moderate
15–25
E20.4
Basic pension worksheet.
Simple
10–15
E20.5
Application of years-of-service method.
Moderate
15–25
E20.6
Computation of actual return.
Simple
10–15
E20.7
Basic pension worksheet.
Moderate
15–25
E20.8
Application of the corridor approach.
Moderate
20–25
E20.9
Disclosures: pension expense and other comprehensive income.
Moderate
25–35
E20.10
Pension worksheet.
Moderate
20–25
E20.12
Pension expense, journal entries, statement presentation.
Moderate
20–30
E20.13
Computation of actual return, gains and losses, corridor test, and
pension expense.
Complex
35–45
E20.14
Worksheet for E20.13.
Complex
40–50
E20.15
Pension expense, journal entries.
Moderate
15–20
E20.16
Amortization of accumulated OCI (G/L), corridor approach,
pension expense computation.
Moderate
25–35
E20.17
Amortization of accumulated OCI balances.
Moderate
30–40
E20.18
Pension worksheet—missing amounts.
Moderate
20–25
Postretirement benefit expense computation.
Moderate
Postretirement benefit worksheet.
Moderate
25–30
Postretirement benefit expense computation.
Simple
10–12
Postretirement benefit expense computation.
Simple
10–12
Postretirement benefit worksheet.
Moderate
15–20
Postretirement benefit worksheet—missing amounts.
Moderate
25–30
P20.1
2-year worksheet.
Moderate
40–50
P20.2
3-year worksheet, journal entries, and reporting.
Complex
45–55
P20.3
Pension expense, journal entries, amortization of loss.
Complex
40–50
P20.4
Pension expense, journal entries for 2 years.
Moderate
30–40
P20.5
Computation of pension expense, amortization of net gain or
loss-corridor approach, journal entries for 3 years.
Complex
45–55
P20.6
expense, journal entries, and net gain or loss.
P20.7
Pension worksheet.
Moderate
35–45
P20.8
Comprehensive 2-year worksheet.
Complex
45–60
P20.9
Comprehensive 2-year worksheet.
Moderate
40–45
P20.10
Pension worksheet—missing amounts.
Moderate
25–30
P20.11
Pension worksheet.
Moderate
35–45
P20.12
Pension worksheet.
Moderate
35–45
Postretirement benefit worksheet.
Moderate
30–35
Postretirement benefit worksheet—2 years.
Moderate
40–45
Computation of prior service cost amortization, pension
Complex
45–60
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA20.1
Pension terminology and theory.
Moderate
30–35
CA20.2
Pension terminology.
Moderate
25–30
CA20.3
Basic terminology.
20–25
CA20.4
Major pension concepts.
Moderate
30–35
CA20.5
Implications of GAAP rules on pensions.
50–60
CA20.6
Gains and losses, corridor amortization.
Moderate
30–40
CA20.7
Nonvested employees—an ethical dilemma.
Moderate
20–30
ANSWERS TO QUESTIONS
**1. A private pension plan is an arrangement whereby a company undertakes to provide its retired
employees with benefits that can be determined or estimated in advance from the provisions of a
**2. A defined-contribution plan specifies the employer’s contribution to the plan usually based on a
formula, which may consider such factors as age, length of service, employer’s profit, or compen–
sation levels.
A defined-benefit plan specifies a determinable pension benefit that the employee will receive at
**3. The employer is the organization sponsoring the pension plan. The employer incurs the costs
and makes contributions to the pension fund. Accounting for the employer involves:
(1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the
amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of
the plan in the financial statements.
**4. When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a
funding agency for the purpose of meeting pension benefits when they become due. When the
Questions Chapter 20 (Continued)
**5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to
meet its pension obligations, to make predictions and assumptions about future events and
conditions that affect pension costs, and to assist the accountant in measuring facets of the pension
plan that must be reported (costs, liabilities and assets). In order to determine the company’s
**6. In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary
**7. One measure of the pension obligation is the vested benefit obligation. This measure uses only
current salary levels and includes only vested benefits; that is, benefits the employee is already
entitled to receive even if the employee renders no additional services under the plan.
A company’s accumulated benefit obligation is the actuarial present value of benefits attributed
**8. Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by
the employer to the pension fund in any period; pension funding serves as the basis for expense
recognition under the cash basis.
Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize
**9. The five components of pension expense are:
(1) Service cost—the actuarial present value of benefits attributed by the pension benefit
formula to employee service during the period.
Questions Chapter 20 (Continued)
10. The service cost component of net periodic pension expense is determined as the actuarial
present value of benefits attributed by the pension benefit formula to employee service during the
11. The interest component is the interest for the period on the projected benefit obligation outstanding
during the period. The assumed discount rate should reflect the rates at which pension benefits
*12. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to
employee service during the period. Actuaries compute service cost at the present value of
*13. When a defined-benefit plan is either initiated or amended, credit is often given to employees for
years of service provided before the date of initiation or amendment. The cost of these retroactive
benefits are referred to as prior service cost. Employers grant retroactive benefits because they
expect to receive benefits in the future. As a result, prior service cost should not be recognized as
*14. Liability gains and losses are unexpected gains or losses from changes in the projected benefit
obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting
Questions Chapter 20 (Continued)
*15. If pension expense recognized in a period exceeds the current amount funded, a liability account
referred to as Pension Asset /Liability arises; the account would be reported either as a current or
*16. Computation of actual return on plan assets
Fair value of plan assets at end of period …………………………... $10,150,000
*17. An asset gain occurs when the actual return on the plan assets is greater than the expected return
on plan assets while an asset loss occurs when the actual return is less than the expected return
*18. Corridor amortization occurs when the accumulated OCI (G/L) balance gets too large. The gain
or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of
*19. The amount of the pension asset/liability to be reported on the company’s balance sheet is as
follows:
*20. The prior service cost arising in the year of the amendment (which increases the projected
benefit obligation) is recognized by an offsetting debit to Other Comprehensive Income (PSC). In
Questions Chapter 20 (Continued)
*21. Actuarial gains or losses arise from (1) asset gains or losses (when the expected return is
different than the actual return on plan assets) and (2) a liability gain or loss (when actuarial
*22. (a) Other Comprehensive Income for 2021 is as follows:
Actuarial liability gain …………………………..………………………………… $10,000
Asset loss ……………………………………………………………………………. 14,000
*23. Multiple plans may be combined and shown as one amount on the balance sheet, only if they are
in the same under or overfunded position. For example, if the company has two or more under–
funded (overfunded) plans, the underfunded (overfunded) plans are combined and shown as one
*24. (a) A contributory plan is a pension plan under which employees contribute part of the cost.
In some contributory plans, employees wishing to be covered must contribute; in other
contributory plans, employee contributions result in increased benefits.
(b) Vested benefits are benefits for which the employee’s right to receive a present or future
Questions Chapter 20 (Continued)
*25. The accounting issue that arises from these terminations is whether a gain should be recognized
by the corporation when these assets revert (often called asset reversion transactions) to the
*26. Postretirement benefits other than pensions include healthcare and other welfare benefits
*27. The FASB did not cover both pensions and healthcare benefits in the earlier pension accounting
rules because of the significant differences between the two types of postretirement benefits.
These differences are listed in the following schedule:
Differences between Postretirement Healthcare Benefits and Pensions
Item
Pensions
Healthcare Benefits
Funding
Generally funded.
Generally NOT funded.
Benefit Payable
Monthly.
As needed and used.
*28. The major differences between pension benefits and postretirement benefits are listed below:
Differences between Postretirement Healthcare Benefits and Pensions
Item
Pensions
Healthcare Benefits
Funding
Generally funded.
Generally NOT funded.
Benefit Payable
Monthly.
As needed and used.
Questions Chapter 20 (Continued)
*29. EPBO (expected postretirement benefit obligation) is the actuary’s present value of all benefits
expected to be paid after retirement, while APBO (accumulated postretirement benefit obligation) is
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 20.1
Service cost ………………………………………………….. $ 366,000,000
BRIEF EXERCISE 20.2
Ending plan assets ………………………………………… $ 2,000,000
Beginning plan assets …………………………………… (1,780,000)
BRIEF EXERCISE 20.3
HENNEIN COMPANY
General Journal Entries
Memo Record
Items
Pension
Expense
Cash
Pension
Asset /Liability
Projected
Benefit
Obligation
Plan
Assets
1/1/20
280,000 Cr.
280,000 Dr.
20,000 Cr.
BRIEF EXERCISE 20.3 (continued)
*Note: We show actual return on the worksheet to ensure that plan assets
BRIEF EXERCISE 20.4
Pension Expense……………………………………………. 73,000,000
BRIEF EXERCISE 20.5
Cost per service year:
$160,000/2,000 = $80
BRIEF EXERCISE 20.6
Project benefit obligation ………………………………………………. $(560,000)
BRIEF EXERCISE 20.7
Net loss in accumulated OCI ………………………………………….. $465,000
BRIEF EXERCISE 20.8
Projected benefit obligation …………………………………………… $2,600,000
Fair value of plan assets ………………………………………………… (2,000,000)
BRIEF EXERCISE 20.9
(a) Other Comprehensive Loss for 2020 is as follows:
Actuarial liability loss ………………………………………. ($ 28,000)
*BRIEF EXERCISE 20.10
Service cost ……………………………………………………………………. $40,000
*BRIEF EXERCISE 20.11
Postretirement Expense ………………………………………. 240,900
SOLUTIONS TO EXERCISES
EXERCISE 20.1 (15.20 minutes)
(a) Computation of pension expense:
Service cost …………………………..………………… $ 60,000
EXERCISE 20.2 (10–15 minutes)
Computation of pension expense:
Service cost ……………………………………………………. $ 90,000
EXERCISE 20.4 (10–15 minutes)
20–18 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
BOUDREAU INC.
Pension Worksheet—2020
General Journal Entries
Memo Record
Balance, January 1, 2020
Service cost
25,000 Cr.
Balance, December 31, 2020
EXERCISE 20.5 (15–25 minutes)
Computation of Service-Years
Year
Jim
Paul
Nancy
Dave
Kathy
Total
2020
1
1
1
1
1
5
2021
1
1
1
1
1
5
2022
1
1
1
1
1
5
2023
1
1
1
1
4
2024
1
1
1
3
2025
1
1
3
4
5
6
6
Computation of Annual Prior Service Cost Amortization
Year
Total
Service-Years
Cost Per
Service-Year
Annual
Amortization
EXERCISE 20.6 (10–15 minutes)
Computation of Actual Return on Plan Assets
Fair value of plan assets at 12/31/20 ………………….. $2,725,000
EXERCISE 20.7 (15–25 minutes)
RYDELL CORP.
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