PROBLEM 20-9
(a) See worksheet on next page.
(b) December 31, 2014
(c) See worksheet on next page. The entry is below.
December 31, 2015
Other Comprehensive Income (PSC) ……………….. 510,000
(d) Financial Statements—2015
Income Statement
Pension expense ……………………………………… $432,440
PROBLEM 20-9 (Continued)
20–62 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
(a) HOBBS COMPANY
Pension Worksheet—2014 and 2015
General Journal Entries Memo Record
Items
Annual
Pension
Expense
Cash
OCI—Prior
Service Cost
OCI—
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan. 1, 2014
4,600,000 Cr.
4,600,000 Dr.
Service cost
150,000 Dr.
150,000 Cr.
Interest cost(a)
460,000 Dr.
460,000 Cr.
Service cost
170,000 Dr.
170,000 Cr.
Interest cost(c)
559,000 Dr.
559,000 Cr.
Actual return
350,000 Cr.
350,000 Dr.
Unexpected loss(d)
36,560 Cr.
36,560 Dr.
Amortization of PSC
90,000 Dr.
90,000 Cr.
Contributions
184,658 Cr.
184,658 Dr.
Benefits
280,000 Dr.
280,000 Cr.
Journal entry for 2015
432,440 Dr.
184,658 Cr.
Accumulated OCI, Dec. 31, 2014
24,000 Dr.
Balance, Dec. 31, 2015
60,560 Dr.
6,039,000 Cr.
5,086,658 Dr.
Actual return
252,000 Cr.
252,000 Dr.
Unexpected loss(b)
24,000 Cr.
24,000 Dr.
Contributions
200,000 Cr.
200,000 Dr.
Benefits
220,000 Dr.
220,000 Cr.
Journal entry for 2014
334,000 Dr.
200,000 Cr.
24,000 Dr.
Accumulated OCI Dec. 31, 2013
Balance, Dec. 31, 2014
24,000 Dr.
4,990,000 Cr.
4,832,000 Dr.
Additional PSC, 1/1/2015
Balance, Jan. 1, 2015
5,590,000 Cr.
KRAMER COMPANY
(a) Completed Worksheet—2014
General Journal Entries Memo Record
Annual
Pension
Expense
Cash
OCI—Prior
Service
Cost
OCI—
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan. 1, 2014
120,000 Cr.
325,000 Cr.
205,000 Dr.
Service cost
20,000 Dr.
20,000 Cr.
Interest cost
26,000 Dr.
26,000 Cr.
(b) 2014
Pension Expense …………………………………………………………………… 60,500
(c) 1. Settlement Rate: $26,000 ÷ $325,000 = 8%
2. Expected return on assets: ($18,000 + $2,500) ÷ $205,000 = 10%
Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 20–63
Actual return
Unexpected loss
Amortization of PSC
35,000 Dr.
Contributions
Benefits
15,000 Dr.
Increase in PBO
43,500 Cr.
Journal entry for 2014
Accumulated OCI, Dec. 31, 2013
Balance, Dec. 31, 2014
KRAMER COMPANY
(a) Completed Worksheet—2015
General Journal Entries Memo Record
Annual
Pension
Expense
Cash
OCI—Prior
Service
Cost
OCI—
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan. 1, 2015
150,500 Cr.
399,500 Cr.
249,000 Dr.
Service cost
59,000 Dr.
59,000 Cr.
PROBLEM 20-11
20–64 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
Interest cost
39,950 Dr.
39,950 Cr.
Unexpected gain
Amortization of PSC
28,000 Dr.
28,000 Cr.
Contributions
51,000 Cr.
Benefits
27,000 Dr.
Accumulated OCI, Dec. 31, 2014
Balance, Dec. 31, 2015
PROBLEM 20-11 (Continued)
Worksheet computations:
Interest cost: $39,950 = $399,500 X 10%
Unexpected gain: $7,100 = ($249,000 X 10%) – $32,000; actual return
exceeds expected return.
(b) 2015
Pension Expense ……………………………………………….. 102,292
Pension Asset/Liability …………………………………. 15,950
Other Comprehensive Income (PSC) …………….. 28,000
Other Comprehensive Income (G/L) ………………. 7,342
Cash …………………………..……………………………….. 51,000
(c) Financial Statements—2015
Income Statement
Pension expense …………………………………………. $102,292
(a) LARSON CORP.
Pension Worksheet—2015
General Journal Entries Memo Record
Annual
Pension
Expense
Cash
OCI—Prior
Service
Cost
OCI—
Gain/Loss
Pension
Asset/Liability
Projected
Benefit
Obligation
Plan
Assets
Balance, Jan. 1, 2015
70,000 Cr.
340,000 Cr.
270,000 Dr.
Service cost
45,000 Dr.
45,000 Cr.
Interest cost*
23,800 Dr.
23,800 Cr.
***
Year
1/1 Projected
Benefit
Obligation
Value of 1/1
Plan Assets
10%
Corridor
Accumulated
OCI (G/L), 1/1
Minimum
Amortization of
Loss for 2015
20–66 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
Actual return
27,000 Cr.
Unexpected gain**
Amortization of PSC
12,000 Dr.
Amortization of loss***
Contributions
65,000 Cr.
Benefits
41,000 Dr.
Journal entry for 2015
59,700 Dr.
65,000 Cr.
Accumulated OCI, Dec. 31, 2014
39,000 Dr.
Balance, Dec. 31, 2015
33,100 Dr.
46,800 Cr.
321,000 Dr.
PROBLEM 20-12 (Continued)
(b) 2015
Pension Expense …………………………………………….. 59,700
(c) Financial Statements—2015
Income Statement
Pension expense ………………………………………. $59,700
(a) HOLLENBECK FOODS INC.
Postretirement Benefit Worksheet—2014
General Journal Entries
Memo Record
Items
Annual
Postretirement
Expense
Cash
OCI—Gain/
Loss
Postretirement
Asset/Liability
APBO
Plan Assets
Balance, Jan. 1, 2014
200,000 Cr.
200,000 Dr.
Service cost
70,000 Dr.
70,000 Cr.
Interest cost*
20,000 Dr.
20,000 Cr.
(b) Journal Entry
Postretirement Expense …………………………………………. 80,000
Other Comprehensive Income (G/L) ………………….. 5,000
Postretirement Asset/Liability …………………………... 10,000
Cash ……………………………………………………………….. 65,000
20–68 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
Actual return
15,000 Cr.
Unexpected gain**
Contributions
Benefits
44,000 Dr.
Journal entry, for 2014
80,000 Dr.
Accumulated OCI, Dec. 31, 2013
Balance, Dec. 31, 2014
246,000 Cr.
236,000 Dr.
*PROBLEM 20-14
(a) See worksheet on next page.
(b) December 31, 2014
Postretirement Expense ……………………………….. 120,000
(c) See worksheet on next page. The entry is below.
December 31, 2015
Other Comprehensive Income (PSC) ……………… 163,000
(d) Financial Statements—2015
Income Statement
Postretirement expense …………………………. $221,800
Balance Sheet
Liabilities
Postretirement liability ……………………………………. $488,500
General Journal Entries Memo Record
Annual
Expense
Cash
OCI—Prior
Service Cost
OCI—
Gain/Loss
Postretirement
Asset/Liability
APBO
Plan
Assets
Balance, Jan. 1, 2014
0
2,250,000 Cr.
2,250,000 Dr.
Service cost
75,000 Dr.
75,000 Cr.
Interest costa
225,000 Dr.
225,000 Cr.
Actual return
140,000 Cr.
140,000 Dr.
*PROBLEM 20-14 (Continued)
20–70 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only)
Unexpected lossb
40,000 Cr.
40,000 Dr.
Contributions
45,000 Cr.
Benefits
40,000 Dr.
Journal entry for 2014
120,000 Dr.
45,000 Cr.
40,000 Dr.
Accumulated OCI, Dec. 31, 2013
Balance, Dec. 31, 2014
40,000 Dr.
2,510,000 Cr.
2,395,000 Dr.
Additional PSC, 1/1/2015
Balance, Jan. 1, 2015
2,685,000 Cr.
Service cost
85,000 Dr.
85,000 Cr.
268,500 Dr.
268,500 Cr.
Actual return
120,000 Cr.
120,000 Dr.
Unexpected lossd
23,700 Cr.
23,700 Dr.
Amortization of PSC
12,000 Dr.
Contributions
35,000 Cr.
Benefits
45,000 Dr.
Journal entry for 2015
221,800 Dr.
35,000 Cr.
Accumulated OCI, Dec. 31, 2014
40,000 Dr.
Balance, Dec. 31, 2015
63,700 Dr.
2,993,500 Cr.
2,505,000 Dr.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 20-1 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to discuss some of the more traditional issues
CA 20-2 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to discuss the terminology employed in GAAP
related to pension accounting.
CA 20-3 (Time 20–25 minutes)
CA 20-4 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to study some of the implications of GAAP as it
CA 20-5 (Time 50–60 minutes)
CA 20-6 (Time 30–40 minutes)
Purpose—to provide the student with the opportunity to explain gains and losses, including the use of
corridor amortization.
CA 20-7 (Time 20–30 minutes)
CA 20-1
(b) The employer is the organization sponsoring the pension plan. The employer incurs the costs
(c) (1) Relative to the pension fund the term “funded” refers to the relationship between pension
funded.
(2) Relative to the pension fund, the pension liability is an actuarial concept representing an
economic liability under the pension plan for future cash payments to retirees. From the
viewpoint of the employer, the pension liability is an accounting credit that results from an
excess of amounts expensed over amounts contributed (funded) to the pension fund.
(d) (1) The theoretical justification for accrual recognition of pension costs is based on the matching
concept. Pension costs are incurred during the period over which an employee renders
(2) Although cash (pay-as-you-go) accounting is highly objective for the final determination of
actual pension costs, it provides no measurement of annual pension costs as they are
incurred. Accrual accounting provides greater objectivity in the annual measurement of
CA 20-1 (Continued)
(e) Terms and their definitions as they apply to accounting for pension plans follow:
(1) Service cost is the actuarial present value of benefits attributed by the pension benefit formula
to employee service during that period. The service cost component is a portion of the
projected benefit obligation and is unaffected by the funded status of the plan.
(2) Prior service costs are the retroactive benefits granted in a plan amendment (or initiation).
(3) Vested benefits are benefits that are not contingent on the employee continuing in the service
of the employer. In some plans the payment of the benefits will begin only when the
employee reaches the normal retirement date; in other plans the payment of the benefits
CA 20-2
1. Pension asset/liability in the asset section is the excess of the fair value of pension plan assets
over the projected benefit obligation.
2. Pension asset/liability in the liability section is the excess of the projected benefit obligation over
the fair value of the pension plan assets.
3. Accumulated OCI—PSC arises when an additional liability is recognized in the PBO due to prior
4. Pension expense is the amount recognized in an employer’s financial statements as the expense
for a pension plan for the period. Components of pension expense are service cost, interest cost,
CA 20-3
(a) (1) The theoretical justification for accrual recognition of pension costs is based on the matching
(2) Although cash (pay-as-you-go) accounting is highly objective for the final determination of
(b) Terms and their definitions as they apply to accounting for pensions follow:
(1) Market-related asset value, when based on a calculated value, is a moving average of
pension plan asset values over a period of time. Considerable flexibility is permitted in
(2) The projected benefit obligation is the present value of vested and nonvested employee
benefits accrued to date based on employees’ future salary levels. This is the pension
liability required by GAAP.
(3) The corridor approach was developed by the FASB as the method for determining when to
(c) The following disclosures about a company’s pension plans should be made in financial
statements or their notes:
1. A description of the plan including employee groups covered, type of benefit formula,
funding policy, types of assets held, and the nature and effect of significant matters affecting
comparability of information for all periods presented.
2. The components of net periodic pension expense for the period.
CA 20-4
(a) Pension benefits are part of the compensation received by employees for their services. The
actual payment of these benefits is deferred until after retirement. The net periodic pension
expense measures this compensation and consists of the following five elements:
1. The service cost component is the present value of the benefits earned by the employees
during the current period.
2. Since a pension represents a deferred compensation agreement, a liability is created when
the plan is adopted. The interest cost component is the increase in that liability, the projected
benefit obligation, due to the passage of time.
(b) The major similarity between the accumulated benefit obligation and the projected benefit
obligation is that they both represent the present value of the benefit attributed by the pension
benefit formula to employee service rendered prior to a specific date. All things being equal,
when an employee is about to retire, the accumulated benefit obligation and the projected benefit
obligation would be the same.
The major difference between the accumulated benefit obligation and the projected benefit
(c) (1) Pension gains and losses, sometimes called actuarial gains and losses, result from changes
in the value of the projected benefit obligation or the fair value of the plan assets. These
(2) In order to decrease the volatility of the reporting of the pension gains or losses, the FASB
had adopted what is referred to as the “corridor approach.” This approach achieves the
CA 20-5
1. This situation can exist because companies vary as to whether they are using an implicit or
explicit set of assumptions when interest rates are disclosed. In the implicit approach, two or
more assumptions do not individually represent the best estimate of the plan’s future experience
with respect to these assumptions, but the aggregate effect of their combined use is presumed to
be approximately the same as that of an explicit approach. In the explicit approach, each
2. This situation will occur because the net funded position of the plan is required to be reported.
That is, companies are required to report as a liability the excess of their projected benefit
obligation over the fair value of plan assets. In the past, the basic liability companies reported
was the excess of the amount expensed over the amount funded.
3. This statement is questionable. If a financial measure purports to represent a phenomenon that is
volatile, the measure must show that volatility or it will not be representationally faithful. Never–
the-less, many argue that volatility is inappropriate when dealing with such long-term measures
4. (a) In a defined-contribution plan, the amount contributed is the amount expensed. No significant
reporting problems exist here. On the other hand, defined benefit plans involve many difficult
reporting issues which may lead to additional expense and liability recognition.
Significant amendments will generally increase prior service cost which may lead to
5. The corridor method is an approach which requires that only gains and losses in excess of 10%
of the greater of the projected benefit obligation or market related plan asset value be allocated.
CA 20-6
To: Vickie Plato, Accounting Clerk
From: Good Student, Manager of Accounting
Date: January 3, 2016
Subject: Amortization of gains and losses in pension expense
Pension expense includes several components; one occasionally included is the amortization of
To decide whether or not you should include gains/losses in annual pension expense, calculate 10 percent
of either the PBO or the PA (whichever is greater) as a “corridor.” Amortize the amount of any gain or
loss falling outside the corridor over the average remaining service life of the active employees. Note: these
gains/losses must exist at the beginning of the year for which amortization takes place [see (a) on the
schedule below].
Thus, in the attached schedule, no amortization of the $280,000 loss in 2013 was required because the
balance in the gain/loss account at the beginning of that year was zero. However, at the beginning
of 2014, the balance in that account was $280,000. The 10 percent corridor is $250,000, so the loss
Finally, if the losses from 2015 are added to the unamortized portion of the loss from prior years, the
sum ($368,000) falls within the 2016 corridor ($390,000) and does not need to be amortized at all.
Corridor and Minimum Loss Amortization Schedule
Year
Projected Benefit
Obligation (a)
Plan Assets
Value (a)
10% Corridor
Accumulated
OCI (G/L) (a)
Minimum
Amortization
of Loss
2013
$2,200,000
$1,900,000
$220,000
$ 0
$ 0
CA 20-6 (Continued)
(a) As of the beginning of the year.
(b) ($280,000 – $250,000) ÷ 10 years = $3,000
CA 20-7
While Habbe may be correct in assuming that the termination of nonvested employees would decrease its
pension-related liabilities and associated expenses, she is callous to suggest that firing employees is a
FINANCIAL REPORTING PROBLEM
(a) P&G offers various postretirement benefits to its employees. The most
prevalent employee benefit plans offered are defined contribution plans,
(b)
2011
Pension expense
$538,000,000
2010
Pension expense
$469,000,000
2009
Pension expense
$341,000,000
(c) In 2011, P&G reports a $4,388,000,000 Accrued Pension Cost on its
balance sheet. It reports $538,000,000 as pension expense on its income
statement. It also reports a postretirement liability of $1,516,000,000
classified as non-current.
FINANCIAL REPORTING PROBLEM (Continued)
Asset Allocation at June 30
Pension Benefits
Other Retiree Benefits
Asset Category
2011
2011
Equity securities
2%
91%
Debt securities
Total
2011 Assumptions used to
determine net periodic cost
Pensions
Other Retiree
Expected return on
plan assets
7.0%
9.2%
As indicated, almost all of the assets in the Other Retiree Benefit fund
are equity investments, which should earn higher (if not also riskier)
returns than debt investments. The differences are consistent with the