66. d $120,000 + $30,000 + ($120,000 × .10) – $25,000 = $137,000.
67. b Conceptual.
68. a ($350,000 + $140,000) – ($350,000 + $56,000) = $84,000.
69. c $480,000 + $48,000 – $165,000 + $120,000 = $483,000.
70. a $480,000 – $400,000 + $60,000 = $140,000.
71. c $1,780,000 – $1,600,000 = $180,000.
72. c Conceptual.
73. b Conceptual.
74. d $3,720,000 – $3,000,000 = $720,000.
75. d Conceptual.
EXERCISES
Ex. 20-76—Pension accounting terminology.
Briefly explain the following terms:
(a) Service cost (b) Interest cost (c) Prior service cost (d) Vested benefits
Solution 20-76
(a) The service cost component of pension expense is the actuarial present value of benefits attributed by the pension benefit formula to employee service during the current period.
(b) The interest cost component of pension expense is the interest for the period on the projected benefit obligation outstanding during the period. To simplify the calculation, the amount of interest is computed by applying a single rate to the beginning balance of the projected benefit obligation.
(c) When a defined benefit plan is initiated or amended, credit that is given to employees for service provided before the date of initiation or amendment results in prior service cost. The amount of prior service cost is computed by an actuary.
(d) Vested benefits are those the employee is entitled to receive even if the employee is no longer employed under the plan.
Ex. 20-77—Pension assets.
Discuss the following ideas related to pension assets:
(a) Market-related asset value.
(b) Actual return on plan assets.
(c) Expected return on plan assets.
(d) Unexpected gains and losses on plan assets.
Solution 20-77
(a) Market-related asset value is a moving average of pension plan assets calculated over not more than five years.
(b) The actual return on plan assets is computed by finding the change in the fair value of plan assets during the period. This change is adjusted by deducting contributions and adding benefits paid out during the year.
(c) The expected return on plan assets is found by multiplying the expected rate of return by the market-related asset value at the beginning of the period.
(d) An unexpected asset gain occurs when the actual return on plan assets is greater than the expected return on plan assets and an unexpected loss occurs when the actual return is less than the expected return.
Ex. 20-78—Measuring and recording pension expense.
Gregory, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined benefit pension plan for the year ended December 31, 2004:
January 1, 2004 December 31, 2004 Projected benefit obligation $3,500,000 $3,990,000
Market-related asset value 1,750,000 2,240,000
Accumulated benefit obligation 2,700,000 3,670,000 Unrecognized net (gains) and losses -0- 420,000
The service cost component for 2004 is $310,000 and the amortization of prior service cost is
$240,000. The company's actual funding of the plan in 2004 amounted to $710,000. The expected return on plan assets and the settlement rate were both 8%.
Instructions
(a) Determine the pension expense to be reported in 2004.
(b) Prepare the journal entry to record pension expense and the employers' contribution to the pension plan in 2004.
Solution 20-78
(a) Service cost $310,000
Interest on projected benefit obligations ($3,500,000 × 8%) 280,000 Expected return on plan assets ($1,750,000 × 8%) (140,000)
Amortization of prior service cost 240,000
Pension expense—2004 $690,000
Solution 20-78 (cont.)
(b) Pension Expense ... 690,000 Prepaid/Accrued Pension Cost ... 20,000
Cash ... 710,000
Ex. 20-79—Additional pension liability.
Reese Co. had the following selected balances at December 31, 2004:
Projected benefit obligation $4,700,000
Accumulated benefit obligation 4,500,000
Fair value of plan assets 4,340,000
Unrecognized prior service cost 120,000
Accrued pension cost 50,000
Instructions
(a) Calculate the additional pension liability.
(b) Prepare the journal entry to record the additional pension liability. There was no additional pension liability balance at the beginning of the year.
Solution 20-79
(a) Accumulated benefit obligation $4,500,000
Fair value of plan assets 4,340,000
Minimum liability 160,000
Accrued pension cost 50,000
Additional liability $ 110,000
(b) Intangible Asset—Deferred Pension Cost ... 110,000
Additional Pension Liability ... 110,000
Ex. 20-80—Pension plan calculations and journal entry.
On January 1, 2004, Stine Co. had the following balances:
Projected benefit obligation $3,700,000
Fair value of plan assets 3,700,000
Other data related to the pension plan for 2004:
Service costs 140,000
Unrecognized prior service cost -0-
Contributions to the plan 224,000
Benefits paid 200,000
Actual return on plan assets 222,000
Settlement rate 9%
Expected rate of return 6%
Ex. 20-80 (cont.) Instructions
(a) Determine the projected benefit obligation at December 31, 2004. There are no net gains or losses.
(b) Determine the fair value of plan assets at December 31, 2004.
(c) Calculate pension expense for 2004.
(d) Prepare the journal entry to record pension expense and the contributions for 2004.
Solution 20-80
(a) Projected benefit obligation, January 1 $3,700,000
Service cost 140,000
Interest cost (9% × $3,700,000) 333,000
Benefits paid (200,000)
Projected benefit obligation, December 31 $3,973,000 (b) Fair value of plan assets, January 1 $3,700,000
Actual return 222,000
Contributions 224,000
Benefits paid (200,000)
Fair value of plan assets, December 31 $3,946,000
(c) Service cost $140,000
Interest cost (9% × $3,700,000) 333,000 Actual return on plan assets (222,000)
Pension expense $251,000
(d) Pension Expense ... 251,000
Accrued/Prepaid Pension Cost ... 27,000 Cash ... 224,000
Ex. 20-81—Pension plan calculations and entries.
Information about the pension plan of Crown Co. is as follows:
12/31/03 12/31/04 Accumulated benefit obligation $4,600,000 $4,810,000 Projected benefit obligation 4,650,000 5,020,000 Unrecognized prior service cost 1,800,000 1,600,000
Fair value of plan assets 4,550,000 4,720,000
Market-related value of assets 4,700,000 4,790,000
Pension expense 1,000,000 1,200,000
Contribution 985,000 1,160,000
Discount rate (for year) 9% 8%
Accrued pension cost was $5,000 at January 1, 2003 and $20,000 at January 1, 2004.
Ex. 20-81 (cont.) Instructions
(a) What is the corridor for 2004?
(b) Calculate the minimum liability at December 31, 2004.
(c) Prepare entries for 2004 to record the pension expense and contribution, and to record the pension liability.
Solution 20-81
(a) .10 × $4,650,000 = $465,000; .10 × $4,700,000 = $470,000 The corridor is the larger, $470,000.
(b) Accumulated benefit obligation $4,810,000
Fair value of plan assets (4,720,000)
Minimum liability $ 90,000
(c) Pension Expense ... 1,200,000
Prepaid/Accrued Pension Cost ... 40,000 Cash ... 1,160,000
Intangible Asset—Deferred Pension Cost ... 30,000
Additional Pension Liability ... 30,000
Minimum liability $90,000
Accrued pension cost, 1/1/04 $20,000
Accrued 2004 40,000 (60,000)
Additional liability $30,000
Ex. 20-82—Corridor amortization.
Explain corridor amortization.
Solution 20-82
The FASB invented the corridor approach for amortizing pension plan gains and losses when they get too large. The unrecognized net gain or loss gets too large when it exceeds the arbitrarily selected criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related asset value. Any systematic method of amortizing the excess unrecognized gain or loss may be used but it cannot be less than the amount computed using the straight-line over the average remaining service-life of all active employees.
Ex. 20-83—Corridor approach amortization of net gains and losses.
Marin Company has 200 employees who are expected to receive benefits under the company's defined benefit pension plan. The total number of service-years of these employees is 2,000.
The actuary for the company's pension plan calculated the following net gains and losses:
For the Year Ended
December 31 (Gain) Or Loss
2003 $440,000
2004 (396,000)
2005 660,000
Prior to 2003, there was no unrecognized net gain or loss.
Information about the company's projected benefit obligation and market-related asset values follows:
As of January 1 2003 2004 2005 Projected benefit obligation $1,400,000 $1,560,000 $1,960,000 Market-related asset values 1,120,000 1,640,000 1,700,000 Instructions
Based on the above information about Marin Company, prepare a schedule which reflects the amount of unrecognized net gain or loss to be amortized by the company as a component of pension expense for the years 2003, 2004, and 2005. The company amortizes unrecognized net gains or losses using the straight-line method over the average service life of participating employees.
Solution 20-83
Corridor Test and Gain/Loss Amortization Schedule
Beginning of Year Cumulative
PBO Plan Assets Corridor (Gain) Or Loss Amortization 2003 $1,400,000 $1,120,000 $140,000 $ -0- $ -0-
2004 1,560,000 1,640,000 164,000 440,000 27,600*
2005 1,960,000 1,700,000 196,000 16,400** -0-
Average Service Years = 2,000 ÷ 200 = 10 years
*$440,000 – $164,000 = $276,000 ÷ 10 = $27,600
**$440,000 – $396,000 – $27,600 = $16,400.
Ex. 20-84—Pension reconciliation schedule.
Drennen Company has available the following information about its defined benefit pension plan for the year ending December 31, 2004:
Service cost for 2004 $ 36,000
Accumulated benefit obligation 984,000
Plan assets at fair value 906,000
Unrecognized prior service cost 432,000
Vested benefit obligation 726,000
Market-related asset value 1,044,000
Projected benefit obligation 1,248,000
Unrecognized net gain 114,000
Interest on projected benefit obligation 90,000
Additional pension liability 54,000
Instructions
Prepare a schedule which reconciles the funded status of the pension plan with the amounts reported in Drennen Company's balance sheet at December 31, 2004.
Solution 20-84
Drennen Company
Pension Reconciliation Schedule For Year Ended December 31, 2004 Actuarial present value of benefit obligations:
Vested benefit obligation $726,000
Accumulated benefit obligation $984,000
Projected benefit obligation $(1,248,000)
Plan assets at fair value 906,000
Projected benefit obligation in excess of plan assets (342,000)
Unrecognized prior service cost 432,000
Unrecognized net (gain) or loss (114,000)
Prepaid/accrued pension cost (24,000)
Additional pension liability (54,000)
Accrued pension cost liability recognized in the balance sheet $ (78,000)
Ex. 20-85—Pension plan calculations.
The following information is for the pension plan for the employees of Stein, Inc.
12/31/03 12/31/04 Accumulated benefit obligation $4,200,000 $5,640,000 Projected benefit obligation 4,500,000 6,000,000 Fair value of plan assets 4,600,000 5,280,000 Market-related value of assets 4,400,000 5,160,000
Net (gain) or loss (640,000) (720,000)
Settlement rate 8% 8%
Expected rate of return 7% 6%
Ex. 20-85 (cont.)
Stein estimates that the average remaining service life is 15 years. Stein's contribution was
$780,000 in 2004 and benefits paid were $420,000.
Instructions
(a) Calculate the interest cost for 2004.
(b) Calculate the actual return on plan assets in 2004.
(c) Calculate the unexpected gain or loss in 2004.
(d) Calculate the corridor for 2004 and the amortization of the net gain for 2004.
Solution 20-85
(a) $4,500,000 × 8% = $360,000
(b) Fair value of plan assets (12/31/04) $5,280,000 Fair value of plan assets (1/1/04) (4,600,000)
680,000
Contributions (780,000)
Benefits paid 420,000
Actual return on plan assets $ 320,000
(c) Actual return (see b.) $ 320,000
Expected return ($4,400,000 × 6%) 264,000
Unexpected gain $ 56,000
(d) .10 × $4,400,000 = $440,000; .10 × $4,500,000 = $450,000.
The corridor is the larger, $450,000.
$640,000 – $450,000 = $190,000; $190,000 ÷ 15 = $12,667 amortization of net gain.
Ex. 20-86—Measuring and recording pension expense.
Presented below is information related to Major Department Stores, Inc. pension plan for 2004.
Accumulated benefit obligation (at year-end) $450,000
Service cost 390,000
Funding contribution for 2004 375,000
Settlement rate used in actuarial computation 10%
Expected return on plan assets 9%
Amortization of prior service cost 75,000
Amortization of unrecognized net gains 36,000
Projected benefit obligation (at beginning of period) 360,000 Market-related asset value (at beginning of period) 270,000 Instructions
(a) Compute the amount of pension expense to be reported for 2004. (Show computations.) (b) Prepare the journal entry to record pension expense and the employer's contribution for
2004.
Solution 20-86
(a) Service cost $390,000
Interest on projected benefit obligation ($360,000 × 10%) 36,000 Expected return on plan assets ($270,000 × 9%) (24,300)
Amortization of prior service cost 75,000
Amortization of unrecognized net gains (36,000)
Pension expense—2004 $440,700
(b) Pension Expense ... 440,700
Prepaid/Accrued Pension Cost ... 65,700 Cash ... 375,000
*Ex. 20-87—Computing and recording postretirement expense.
The following information is related to the Santo Co. postretirement benefits plan for 2004:
Service cost $ 210,000
Discount rate 10%
EPBO, January 1, 2004 1,025,000
APBO, January 1, 2004 800,000
Unrecognized transition amount amortization 41,000 Actual return on plan assets in 2004 28,000 Expected return on plan assets in 2004 36,500
Contributions (funding) 280,000
Instructions
(a) Compute the amount of postretirement expense for 2004. (Show computations.)
(b) Prepare the journal entry to record postretirement expense and Santo's contributions for 2004.
*Solution 20-87
(a) Service cost $210,000
Interest cost (10% × $800,000) 80,000
Amortization of transition amount 41,000
Actual return on plan assets (28,000)
Unexpected loss (8,500)
Postretirement expense—2004 $294,500
(b) Postretirement Expense ... 294,500
Cash ... 280,000 Prepaid/Accrued Cost ... 14,500
*Ex. 20-88—Computing postretirement expense and APBO.
The following information is related to the postretirement benefits plan of Gordon, Inc. for 2004:
Service cost $ 210,000
Discount rate 8%
APBO, January 1, 2004 1,600,000
EPBO, January 1, 2004 1,800,000
Actual return on plan assets in 2004 78,000 Expected return on plan assets in 2004 71,600 Amortization of unrecognized transition amount 80,400 Amortization of unrecognized net gain 5,400
Contributions (funding) 300,000
Benefit payments 156,000
Instructions
(a) Compute the amount of postretirement expense for 2004. (Show computations.) (b) Compute the amount of the APBO at December 31, 2004.
*Solution 20-88
(a) Service cost $210,000
Interest cost (8% × $1,600,000) 128,000
Actual return on plan assets (78,000)
Unexpected gain 6,400
Amortization of transition amount 80,400
Amortization of net gain (5,400)
Postretirement expense—2004 $341,400
(b) APBO, January 1, 2004 $1,600,000
Service cost 210,000
Interest cost 128,000
Benefit payments (156,000)
APBO, December 31, 2004 $1,782,000
PROBLEMS
Pr. 20-89—Measuring and recording pension expense.
Presented below is information related to the pension plan of Vector Inc. for the year 2004.
1. The service cost of pension expense is $450,000 using the projected benefits approach.
2. The projected benefit obligation and the accumulated benefit obligation at the beginning of the year are $560,000 and $525,000, respectively. The expected return on plan assets is 9% and the settlement rate is 10%
3. The unrecognized prior service cost at the beginning of the year is $260,000. The company has a workforce of 200 employees, all who are expected to receive benefits under the plan.
The total number of service-years is 1,000 and the service-years attributable to 2004 is 200.
The company has decided to use the years-of-service method of amortization for these costs.
4. At the beginning of the period, the market-related asset value was $525,000 and the fair value of pension plan assets, $530,000. The company had an unrecognized net loss at the beginning of the period of $170,000. Any amortization of unrecognized net loss is recognized on a straight-line basis over the average remaining service-life of the employees.
5. The contribution made to the pension fund in 2004 was $435,000.
Instructions
(a) Determine the pension expense to be reported on the income statement for 2004. (Round all computations to nearest dollar.)
(b) Prepare the journal entry(ies) to record pension expense for 2004.
Solution 20-89
(a) Service cost (projected benefits approach) $450,000 Interest on projected benefit obligation (10% × $560,000) 56,000 Expected return on plan assets (9% × $525,000) (47,250)
Amortization of prior service cost (1) 52,000
Amortization of loss (2) 22,800
Pension expense $533,550
(1) $260,000
———— = $260
1,000
200 × $260 = $52,000
Solution 20-89 (cont.)
(2) Market-related asset value $525,000
10%
$ 52,500
Projected benefit obligation $560,000
10%
$ 56,000
Net loss (beginning of period) $170,000 Higher of 10% of projected benefit obligation or market-related
asset value 56,000
Amount to be amortized $114,000
1,000 Expected Future Years of Service
——— —————————————
200 = Number of Employees —— = 5 years $114,000
———— = $22,800 5 years
(b) Pension Expense ... 533,500
Prepaid/Accrued Pension Cost ... 98,550 Cash ... 435,000
Pr. 20-90—Preparing a pension work sheet.
The accountant for Neeman Corporation has developed the following information for the company's defined benefit pension plan for 2004:
Service cost $ 800,000
Actual return on plan assets 420,000
Annual contribution to the plan 440,000
Amortization of unrecognized prior service cost 168,000
Benefits paid to retirees 96,000
Settlement rate 10%
Expected rate of return on plan assets 8%
The accumulated benefit obligation at December 31, 2004, amounted to $6,800,000.
Instructions
(a) Using the above information for Neeman Corporation, complete the pension work sheet for 2004. Indicate (credit) entries by parentheses. Calculated amounts should be supported.
(b) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ending December 31, 2004.
Pr. 20-90 (cont.) Neeman Corporation Pension Work Sheet—2004
——————————————————————————————————————————————————————————
General Journal Entries Memo Entries
——————————————————————————————————————————————————————————
Unrecog- Unrecog-
nized nized
Annual Prepaid/ Addi- Projected Prior Net
Pension (Accrued) tional Pension Benefit Plan Service (Gain) Expense Cash Cost Liability Intangible Obligation Assets Cost or Loss
——————————————————————————————————————————————————————————
Bal., Dec. 31, 2003 (600,000) (6,000,000) 4,400,000 1,000,000
——————————————————————————————————————————————————————————
Service Cost
——————————————————————————————————————————————————————————
Interest Cost
——————————————————————————————————————————————————————————
Actual return
——————————————————————————————————————————————————————————
Unexpected gain/loss
——————————————————————————————————————————————————————————
Amortization of PSC
——————————————————————————————————————————————————————————
Contributions
——————————————————————————————————————————————————————————
Benefits
——————————————————————————————————————————————————————————
Unrecognized gain/loss amort.
——————————————————————————————————————————————————————————
Minimum liability adjustment Journal entry
for 2004
Balance,
Dec. 31, 2004
Solution 20-90 Neeman Corporation Pension Work Sheet—2004
——————————————————————————————————————————————————————————
General Journal Entries Memo Entries
——————————————————————————————————————————————————————————
Unrecog- Unrecog-
nized nized
Annual Prepaid/ Addi- Projected Prior Net
Pension (Accrued) tional Pension Benefit Plan Service (Gain) Expense Cash Cost Liability Intangible Obligation Assets Cost or Loss
——————————————————————————————————————————————————————————
Bal., Dec. 31, 2003 (600,000) (6,000,000) 4,400,000 1,000,000
——————————————————————————————————————————————————————————
Service Cost 800,000 (800,000) Accounting for Pensions and Postretirement Benefits
——————————————————————————————————————————————————————————
Interest Cost (1) 600,000 (600,000)
——————————————————————————————————————————————————————————
Actual return (420,000) 420,000
——————————————————————————————————————————————————————————
Unexpected
gain/loss (2) 68,000 (68,000)
——————————————————————————————————————————————————————————
Amortization
of PSC 168,000 (168,000)
——————————————————————————————————————————————————————————
Contributions (1,440,000) 1,440,000
——————————————————————————————————————————————————————————
Benefits 96,000 (96,000)
——————————————————————————————————————————————————————————
Unrecognized gain/loss amort.
——————————————————————————————————————————————————————————
Minimum liability
adjustment (3) (260,000) 260,000 Journal entry
for 2004 1,216,000 (1,440,000) 224,000 Balance,
Dec. 31, 2004 (376,000) (260,000) 260,000 (7,304,000) 6,164,000 832,000 (68,000)
Solution 20-90 (cont.)
(1) $6,000,000 × 10% = $600,000
(2) $420,000 – ($4,400,000 × 8%) = $68,000
(3) Accumulated Benefit Obligation $(6,800,000) Plan assets at fair value 6,164,000
Unfunded accumulated benefit (636,000) Minimum Liability Prepaid/Accrued Pension Cost (376,000)
Additional liability $ (260,000)
(b) Pension Expense ... 1,216,000 Prepaid/Accrued Pension Cost ... 224,000
Cash ... 1,440,000 Intangible Asset—Deferred Pension Cost ... 260,000
Additional Pension Liability ... 260,000
Pr. 20-91—Amortization of prior service cost using years-of-service method.
On January 1, 2003, Lawson Incorporated amended its pension plan which caused an increase of $4,800,000 in its projected benefit obligation. The company has 400 employees who are expected to receive benefits under the company's defined benefit pension plan. The personnel department provided the following information regarding expected employee retirements:
Expected Retirements
Number of Employees On December 31
40 2003
120 2004
60 2005
160 2006
20 2007 400
The company plans to use the years-of-service method in calculating the amortization of unrecognized prior service cost as a component of pension expense.
Instructions
Prepare a schedule which shows the amount of annual prior service cost amortization that the company will recognize as a component of pension expense from 2003 through 2007.
Solution 20-91
Cost Per Service Year: $4,800,000 ÷ 1,200 = $4,000.
Lawson Incorporated
Computation of Annual Prior Service Cost Amortization
Total Cost Per Annual
Year Service-Years Service-Year Amortization
2003 400 $4,000 $1,600,000
Pr. 20-92—Measuring, recording, and reporting pension expense and liability.
Eckert, Inc. on January 1, 2004 initiated a noncontributory-defined benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan. The total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the present value of the projected benefit obligation on January 1, 2004 was $3,780,000. On December 31, 2004 the following information was provided concerning the pension plan's operations for its first year.
Employer's contribution at end of year $1,200,000
Service cost 450,000
Accumulated benefit obligation 3,820,000
Projected benefit obligation 4,500,000
Plan assets (at fair value) 1,200,000
Market-related asset value 1,200,000
Expected return on plan assets 9%
Settlement rate 8%
Instructions
(a) What is the prior service cost at January 1, 2004?
(b) Compute the pension expense recognized in 2004. Assume the prior service cost is amortized over the average remaining service life of the employees.
(c) Prepare the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2004.
(d) Indicate the amounts that are reported on the income statement and the balance sheet for 2004.
Solution 20-92 (a) $3,780,000.
(b) Service cost $ 450,000
Interest on projected benefit obligation ($3,780,000 × 8%) 302,400 Amortization of prior service cost* 315,000
Pension expense—2004 $1,067,400
*1,200
——— 100 = 12 years average remaining service life
$3,780,000
————— = $315,000 12
(c) Pension Expense... 1,067,400 Prepaid Pension Cost ... 132,600
Cash ... 1,200,000 Intangible Asset—Deferred Pension Cost ... 2,752,600*
Additional Pension Liability ... 2,752,600
*Accumulated benefit obligation $3,820,000 Plan assets (at fair value) 1,200,000 Unfunded accumulated benefit obligation 2,620,000
Prepaid pension cost 132,600
Additional pension liability $2,752,600 (d) Income statement
Pension Expense $1,067,400
Balance sheet
Intangible Asset—Deferred Pension Cost $2,752,600
Accrued Pension Cost $2,620,000