ch20.doc.pdf

(1)

CHAPTER 20

ACCOUNTING FOR PENSIONS

AND POSTRETIREMENT BENEFITS

CHAPTER LEARNING OBJECTIVES

1. Distinguish between accounting for the employer's pension plan and accounting for the pension fund.

2. Identify types of pension plans and their characteristics. 3. Explain measures for valuing the pension obligation. 4. Identify amounts reported in financial statements. 5. Use a worksheet for employer's pension plan entries. 6. Explain the accounting for past service costs.

7. Explain the accounting for remeasurements.

8. Describe the requirements for reporting pension plans in financial statements. 9. Explain the accounting for other postretirement benefits.

(2)

TRUE-FALSE

—Conceptual

1. A pension plan is contributory when the employer makes payments to a funding agency. 2. Qualified pension plans permit deductibility of the employer’s contributions to the pension

fund.

3. Qualified pension plans permit tax-free status of earnings from pension fund assets. 4. In a defined contribution plan, the employer must make up any shortfall in the

accumulated assets held by the defined contribution trust.

5. IFRS encourages, but does not require, companies to use actuaries in the measurement of the pension amounts.

6. The employees are the beneficiaries of a defined contribution trust, but the employer is the beneficiary of a defined benefit trust.

7. An employer does not have to report a liability on its statement of financial position in a defined-benefit plan.

8. Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.

9. Companies compute the vested benefit obligation using only vested benefits, at current salary levels.

10. The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels.

11. Regarding the alternatives for measuring the pension liability, the profession adopted the accumulated benefit obligation using the present value of vested and non-vested benefits accrued to date, based on employees’ future salary levels.

12. If a company grants plan amendments, it allocates the past service cost of providing these retroactive benefits to pension expense in the future, specifically to the remaining service-years of the affected employees.

13. Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year.

14. The interest expense component of pension expense in the current period is computed by multiplying the discount rate by the beginning balance of the defined benefit obligation. 15. Companies should recognize the entire increase in defined benefit obligation due to a plan

initiation or amendment as pension expense in the year of amendment.

16. For defined benefit plans, IFRS recognizes a pension asset or liability as the funded status of the plan.

(3)

17. The difference between the expected return and the actual return is referred to as the asset gain or loss.

18. The unexpected gains and losses from changes in the defined benefit obligation are called asset gains and losses.

19. Companies report any actuarial gains or losses charged or credited to other comprehensive income in the statement of financial position.

20. A curtailment occurs when a company enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan.

True-False Answers—

Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. F 5. T 9. T 13. F 17. T

2. T 6. T 10. F 14. T 18. F

3. T 7. F 11. F 15. T 19. T

4. F 8. T 12. F 16. T 20. F

MULTIPLE CHOICE

—Conceptual

21. In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following are considered by the actuary:

a. retirement and mortality rate. b. interest rates.

c. benefit provisions of the plan.

d. all of these answer choices are considered.

22. In a defined-benefit plan, the process of funding refers to a. determining the defined benefit obligation.

b. determining the accumulated benefit obligation.

c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

d. determining the amount that might be reported for pension expense. 23. In all pension plans, the accounting problems include all the following except

a. measuring the amount of pension obligation.

b. disclosing the status and effects of the plan in the financial statements. c. allocating the cost of the plan to the proper periods.

d. determining the level of individual premiums. 24. In a defined-contribution plan, a formula is used that

a. defines the benefits that the employee will receive at the time of retirement. b. ensures that pension expense and the cash funding amount will be different.

c. requires an employer to contribute a certain sum each period based on the formula. d. ensures that employers are at risk to make sure funds are available at retirement.

(4)

25. In a defined-benefit plan, a formula is used that

a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.

b. defines the benefits that the employee will receive at the time of retirement. c. requires that pension expense and the cash funding amount be the same.

d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

s_26. _{Which of the following is not a characteristic of a defined-contribution pension plan?} a. The employer's contribution each period is based on a formula.

b. The benefits to be received by employees are usually determined by an employee’s three highest years of salary defined by the terms of the plan.

c. The accounting for a defined-contribution plan is straightforward and uncomplicated. d. The benefit of gain or the risk of loss from the assets contributed to the pension fund

are borne by the employee.

s_27. _{In accounting for a defined-benefit pension plan}

a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.

b. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.

c. the expense recognized each period is equal to the cash contribution.

d. the liability is determined based upon known variables that reflect future salary levels promised to employees.

s_28. _{Alternative methods exist for the measurement of the pension obligation (liability). Which} measure requires the use of future salaries in its computation?

a. Vested benefit obligation b. Accumulated benefit obligation c. Defined benefit obligation d. Restructured benefit obligation

29. The accumulated benefit obligation measures

a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.

c. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.

d. the shortest possible period for funding to maximize the tax deduction. 30. The defined benefit obligation is the measure of pension obligation that

a. is required to be used for reporting the service cost component of pension expense. b. requires pension expense to be determined solely on the basis of the plan formula

applied to years of service to date and based on existing salary levels.

c. requires the longest possible period for funding to maximize the tax deduction.

d. is not sanctioned under international financial reporting standards for reporting the service cost component of pension expense.

(5)

31. Differing measures of the pension obligation can be based on

a. all years of service—both vested and nonvested—using current salary levels. b. only the vested benefits using current salary levels.

c. both vested and nonvested service using future salaries. d. All of these answer choices are correct.

32. Vested benefits

a. usually require a certain minimum number of years of service. b. are those that the employee is entitled to receive even if fired. c. are not contingent upon additional service under the plan. d. are defined by all of these answer choices.

33. The relationship between the amount funded and the amount reported for pension expense is as follows:

a. pension expense must equal the amount funded. b. pension expense will be less than the amount funded. c. pension expense will be more than the amount funded.

d. pension expense may be greater than, equal to, or less than the amount funded. 34. The computation of pension expense includes all the following except

a. service cost component measured using current salary levels. b. interest on defined benefit obligation.

c. interest revenue on plan assets.

d. All of these answer choices are included in the computation.

35. In computing the service cost component of pension expense, the IASB concluded that a. the accumulated benefit obligation provides a more realistic measure of the pension

obligation on a going concern basis.

b. a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.

c. the defined benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

d. All of these answer choices are correct.

36. The interest rate used on the defined benefit obligation component of pension expense a. reflects the incremental borrowing rate of the employer.

b. reflects the rates at which pension benefits could be effectively settled. c. is the same rate used to compute the interest revenue on plan assets. d. may be stated implicitly or explicitly when reported.

37. One component of pension expense is interest revenue on plan assets. Plan assets include

a. contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved.

b. plan assets still under the control of the company.

c. only assets reported on the statement of financial position of the employer as pension asset/liability.

(6)

38. The actual return on plan assets

a. is equal to the change in the fair value of the plan assets during the year. b. includes interest, dividends, and changes in the fair value of the fund assets.

c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.

d. All of these answer choices are correct.

39. In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

a. an offset to the liability for past service cost. b. pension asset/liability.

c. as other comprehensive income (G/L)

d. as accumulated other comprehensive income (PSC).

40. Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

Fair value Past

of plan assets service cost

a. Yes Yes

b. Yes No

c. No Yes

d. No No

41. A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

a. defined benefit obligation exceeds the fair value of the plan assets. b. fair value of the plan assets exceeds the defined benefit obligation. c. amount of employer contributions exceeds the pension expense.

d. amount of pension expense exceeds the amount of employer contributions. 42. When a company adopts a pension plan, past service costs should be charged to

a. other comprehensive income (PSC). b. operations of prior periods.

c. operations of the current period. d. retained earnings.

43. When a company amends a pension plan, for accounting purposes, past service costs should be

a. treated as a prior period adjustment because no future periods are benefited. b. amortized in accordance with procedures used for income tax purposes. c. recorded in other comprehensive income (PSC).

d. reported as an expense in the period the plan is amended. 44. Past service cost is amortized on a

a. straight-line basis over the expected future years of service.

b. years-of-service method or on a straight-line basis over the average remaining service life of active employees.

c. straight-line basis over 10 years. d. past service costs are not amortized.

(7)

45. Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

a. both the accumulated benefit obligation and the defined benefit obligation are usually greater than before.

b. both the accumulated benefit obligation and the defined benefit obligation are usually less than before.

c. the expense and the liability should be recognized at the time the benefits are paid. d. the expense should be recognized immediately, but the liability may be deferred until a

reasonable basis for its determination has been identified.

46. The unexpected gains or losses that result from changes in the defined benefit obligation are called

Asset Liability

Gains & Losses Gains & Losses

a. Yes Yes

b. No No

c. Yes No

d. No Yes

47. A pension liability is reported when

a. the defined benefit obligation exceeds the fair value of pension plan assets.

b. the accumulated benefit obligation is less than the fair value of pension plan assets. c. the pension expense reported for the period is greater than the funding amount for the

same period.

d. accumulated other comprehensive income exceeds the fair value of pension plan assets. 48. A pension asset is reported when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets. b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a

past service cost exists.

c. pension plan assets at fair value exceed the accumulated benefit obligation. d. pension plan assets at fair value exceed the defined benefit obligation. 49. Which of the following statements is correct?

a. There is an account titled Pension Asset / Liability. b. There is an account titled Defined Benefit Obligation.

c. Unrecognized net gain or loss should be reported in the liability section of the balance sheet.

d. Other comprehensive income (PSC) should be included in net income.

50. According to the IASB, recognition of a liability is required when the defined benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the defined benefit obligation, the Board

a. requires recognition of an asset.

b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.

c. recommends recognition of an asset but does not require such recognition. d. does not permit recognition of an asset.

(8)

51. Which of the following disclosures of pension plan information would not normally be required?

a. The major components of pension expense

b. The amount of past service cost changed or credited in previous years.

c. The funded status of the plan and the amounts recognized in the financial statements d. The rates used in measuring the benefit amounts

52. Differences between pensions and postretirement benefits include all of the following

except

a. Postretirement healthcare benefits are generally uncapped while pensions are generally well-defined.

b. Postretirement healthcare benefits are generally paid as needed and used, whereas pension benefits are generally paid monthly.

c. Postretirement healthcare benefits are generally paid only to the retiree while, pensions are generally paid to the retiree, the spouse, and other dependents.

d. Postretirement healthcare benefits are generally not funded while pensions are generally funded.

Multiple Choice Answers

—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 28. c 35. c 42. c 49. a 22. c 29. a 36. c 43. d 50. a 23. d 30. a 37. a 44. d 51. b 24. c 31. d 38. b 45. a 52. c 25. b 32. d 39. b 46. d 26. b 33. d 40. c 47. a 27. a 34. a 41. a 48. d

MULTIPLE CHOICE

—Computational

53. Presented below is pension information related to Woods, Inc. for the year 2016:

Service cost $72,000

Interest on defined benefit obligation 54,000

Interest on vested benefits 24,000

Expected return on plan assets 18,000

The amount of pension expense to be reported for 2016 is a. $120,000.

b. $144,000. c. $162,000. d. $108,000.

(9)

54. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2016.

Service cost $ 200,000

Contributions to the plan 220,000

Actual return on plan assets 180,000

Defined benefit obligation (beginning of year) 2,400,000 Fair value of plan assets (beginning of year) 1,600,000 The discount rate was 10%. The amount of pension expense reported for 2016 is a. $200,000.

b. $260,000. c. $280,000. d. $440,000.

55. Presented below is information related to Jensen Inc. pension plan for 2016.

Net loss 30,000

Past service cost due to increase in benefits 165,000

Interest revenue on plan assets 180,000

What amount should be reported for pension expense in 2016? a. $1,365,000

b. $1,335,000 c. $1,275,000 d. $1,155,000

56. Barton, 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, 2016.

January 1, 2016 December 31, 2016 Fair value of pension plan assets $4,200,000 $4,500,000

Defined benefit obligation 4,800,000 5,160,000

Accumulated OCI—Net Gain / Loss -0- (90,000)

The service cost component of pension expense for 2016 is $360,000 and the past service cost due to an increase in benefits is $60,000. The discount rate is 10%. What is the amount of pension expense for 2016?

a. $360,000 b. $522,000 c. $531,000 d. $432,000

(10)

Use the following information for questions 57 and 58.

The following information for Cooper Enterprises is given below:

December 31, 2016 Assets and obligations

Plan assets (at fair value) $100,000

Defined benefit obligation 200,000

Other Items

Pension asset / liability, January 1, 2016 5,000

Contributions 60,000

Accumulated OCI(Gain/Loss) 83,950

There was no accumulated OCI at January 1, 2016. The average remaining service life of employees is 10 years.

57. What is the pension expense that Cooper Enterprises should report for 2016? a. $71,050

b. $110,000 c. $60,000 d. $83,950

58. What is the amount that Cooper Enterprises should report as its pension liability on its statement of financial position as of December 31, 2016?

a. $100,000 b. $15,000 c. $105,000 d. $200,000

59. The following information is related to the pension plan of Long, Inc. for 2016.

Actual return on plan assets $200,000

Net gain on liability 82,500

Past service cost due to increase in benefits 150,000

Interest on plan assets 230,000

Service cost 800,000

Pension expense for 2016 is a. $1,195,000.

b. $1,165,000. c. $1,000,000. d. $1,082,500.

60. Presented below is pension information for Green Company for the year 2016:

Interest on plan assets $24,000

Interest on vested benefits 15,000

Service cost 30,000

Interest on defined benefit obligation 21,000 Past service cost due to increase in benefits 18,000 The amount of pension expense to be reported for 2016 is

a. $93,000. b. $69,000. c. $60,000.

(11)

d. $45,000.

61. Hubbard, 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, 2016.

1/1/16 12/31/16 Defined benefit obligation $11,400,000 $11,760,000 Pension assets (at fair value) 6,000,000 6,900,000

Net (gains) and losses -0- 240,000

The service cost component of pension expense for 2016 is $840,000 and the past service cost due to an increase in benefits is $180,000 effective January 1, 2016. The discount rate is 10%. What is the amount of pension expense for 2016?

a. $1,800,000 b. $1,578,000 c. $1,506,000 d. $1,380,000

The following data are for the pension plan for the employees of Lockett Company.

1/1/15 12/31/15 12/31/16 Defined benefit obligation $8,100,000 $8,400,000 $11,100,000 Plan assets (at fair value) 6,900,000 9,000,000 9,900,000

AOCI – net loss -0- 1,440,000 1,500,000

Discount rate (for year) 8% 7%

Lockett’s contribution was $1,260,000 in 2016 and benefits paid were $1,125,000. Lockett estimates that the average remaining service life is 15 years.

62. The actual return on plan assets in 2016 was a. $900,000.

b. $765,000. c. $600,000. d. $465,000.

63. Assume that the actual return on plan assets in 2016 was $800,000. The gain on plan assets in 2016 was

a. $191,000. b. $170,000. c. $149,000. d. $107,000.

64. At the end of the current period, Oxford Ltd. has a defined benefit obligation of £195,000 and pension plan assets with a fair value of £110,000. The amount of the vested benefits for the plan is £105,000. What amount related to its pension plan will be reported on the company’s statement of financial position?

a. £5,000 b. £90,000 c. £85,000 d. £20,000

(12)

65. At the end of the current year, Kennedy Co. has a defined benefit obligation of £335,000 and pension plan assets with a fair value of £245,000. The amount of the vested benefits for the plan is £225,000. Kennedy has an accumulated actuarial gain of £8,300. What account and amountrelated to its pension plan will be reported on the company’s statement of financial position?

a. Pension liability of £74,300 b. Pension liability of £90,000 c. Pension asset of £233,300 d. Pension asset of £110,000

66. At the end of the current year, Churchill Industries has a defined obligation of £433,000 and pension plan assets with a fair value of £265,000. The amount of the vested benefits for the plan is £225,000. Churchill has an accumulated actuarial gain of £12,900. What account and amountrelated to its pension plan will be reported on the company’s statement of financial position?

a. Pension asset of £168,000 b. Pension liability of £109,100 c. Pension liability of £134,900 d. Pension asset of £115,900

67. For 2016, Garvey Chambers plc had pension expense of £61 million and contributed £52 million to the pension fund. Which of the following is the journal entry that Garvey Chambers would make to record pension expense and funding?

a. Pension Expense……….. 61,000,000 Pension Asset/Liability………. 9,000,000 Cash……….... 52,000,000 b. Pension Expense………. 61,000,000 Pension Asset/Liability………. 9,000,000 Cash……… 70,000,000 c. Pension Expense………. 52,000,000 Pension Asset/Liability……… 9,000,000 Cash……… 61,000,000 d. Pension Expense……… 9,000,000 Pension Asset/Liability……… 52,000,000 Cash……… 61,000,000

(13)

68. Clarkson Co. provides the following information about its pension plan for the year 2016.

Service cost £90,000

Contribution to the plan 16,000

Benefits paid 40,000

Plan assets at January 1, 2016 710,000

Defined benefit obligation at January 1, 2016 810,000 Unrecognized past service cost balance at January 1, 2016 100,000

Discount rate 9%

Based on this information, what is the pension expense for 2016? a. £108,000

b. £271,900 c. £199,000 d. £208,000

69. Carlton Co. provides the following information about its pension plan for the year 2016.

Service cost £95,000

Contribution to the plan 16,000

Plan assets at January 1, 2016 810,000

Defined benefit obligation at January 1, 2016 910,000 Unrecognized past service cost balance at January 1, 2016 100,000

Discount rate 8%

Based on this information, what is the pension expense for 2016? a. £210,800

b. £203,000

c. £72,800 111,000 d. £211,000

70. At January 1, 2016, Wembley Company had plan assets of €250,000 and a defined benefit obligation of the same amount. During 2016, service cost was €27,500, the discount rate was 10%, actual and expected return on plan assets were €25,000, contributions were €20,000, and benefits paid were €17,500. Based on this information what would be the defined benefit obligation for Wembley Company for 2016?

a. €277,500 b. €285,000 c. €27,500 d. €302,500

71. At January 1, 2016, Trevor Company had plan assets of €215,000 and a defined benefit obligation of the same amount. During 2016, service cost was €22,500, the discount rate was 10% actual and expected return on plan assets were €26,000, contributions were €20,000, and benefits paid were €19,500. Based on this information what would be the Defined benefit obligation for Trevor Company for 2016?

a. €263,500 b. €239,500 c. €22,500 d. €259,000

(14)

72. At January 1, 2016, Wembley Company had plan assets of €250,000 and a defined benefit obligation of the same amount. During 2016, service cost was €27,500, the discount rate was 10% actual return on plan assets was €25,000, contributions were €20,000, and benefits paid were €17,500. Based on this information, what would be the amount of plan assets on 12/31/16?

a. A debit balance of €277,500 b. A debit balance of €295,000 c. A credit balance of €7,500 d. A credit balance of €285,000

73 At January 1, 2016, Pimlico Company had plan assets of £215,000 and a defined benefit obligation of the same amount. During 2016, service cost was £27,500, the discount rate was 10% actual return on plan assets was £28,000, contributions were £22,000, and benefits paid were £18,500. Based on this information, what would be the amount of plan assets on 12/31/16?

a. A debit balance of £265,000 b. A debit balance of £5,500 c. A credit balance of £246,500 d. A credit balance of £283,500

Use the following information for questions 74 and 75. On January 1, 2016, Newlin Co. has the following balances:

Defined benefit obligation $2,100,000 Fair value of plan assets 1,800,000

The discount rate is 10%. Other data related to the pension plan for 2016 are:

Past service costs due to increase in benefits 60,000

74. The balance of the defined benefit obligation at December 31, 2016 is a. $2,433,000.

b. $2,385,000. c. $2,355,000. d. $2,337,000.

75. The fair value of plan assets at December 31, 2016 is a. $2,430,000.

b. $2,250,000. c. $2,232,000. d. $2,214,000.

(15)

Use the following information for questions 76 through 79.

The following information relates to the pension plan for the employees of Turner Co.:

1/1/15 12/31/15 12/31/16 Defined benefit obligation $5,580,000 $5,976,000 $8,004,000 Fair value of plan assets 5,100,000 6,240,000 6,888,000

Net (gain) or loss -0- (164,000) (96,000)

Turner estimates that the average remaining service life is 16 years. Turner's contribution was $756,000 in 2016 and benefits paid were $564,000.

76. The interest expense for 2016 is a. $537,840.

b. $607,200. c. $657,360. d. $880,440.

77. The actual return on plan assets in 2016 is a. $408,000.

b. $456,000. c. $588,000. d. $648,000.

78. The gain or loss on plan assets in 2016 is a. $96,000 gain.

b. $201,360 loss. c. $230,400 loss. d. $68,000 gain.

79. The net interest amount for 2016 is a. $122,760 loss.

b. $30,800 gain. c. $122,766 gain d. $38,800 loss.

80. Dawson plc amends its defined pension plan on January 1, 2016, resulting in £420,000 of past service cost. The company has 400 active employees, of which 100 vest immediately (25%) and the other 300 (75%) vest in four years. The past service cost applicable to the vested employees is £105,000 and vests immediately. The past service cost related to the unvested employees is £315,000 and vests over five years. How much of past service costs would Dawson include in pension expense in 2016?

a. £420,000 b. £126,000 c. £105,000 d. £168,000

(16)

81. Clarkson plc amends its defined pension plan on January 1, 2016, resulting in £520,000 of past service cost. The company has 600 active employees, of which 120 vest immediately (20%) and the other 480 (80%) vest in three years. The past service cost applicable to the vested employees is £104,000 and vests immediately. The past service cost related to the unvested employees is £416,000 and vests over five years. How much of the past service costs would Clarkson include in pension expense in 2016?

a. £332,800 b. £520,000 c. £416,000 d. £436,800

82. Towson Ltd. has experienced tough competition, leading it to seek concessions from its employees in the company’s pension plan. In exchange for promises to avoid layoffs and wage cuts, the employees agreed to receive lower pension benefits in the future. As a result, Towson amended its pension plan on January 1, 2016, and recorded past service cost of €225,000. The average period to vesting for the benefits affected by this plan is 6 years. What is the amount of past service cost included in pension expense for 2016? a. €37,500

b. €112,500 c. €225,000 d. €18,750

83. Brompton Ltd. is evaluating amendments to its pensions plans. Plan 1 covers its salaried employees and Plan 2 provides benefits to its hourly workers. On January 1, 2016, Brompton will grant employees in Plan 2 additional pension benefits of €318,000 based on their past service. Employees in this plan have an average period to vesting of 6 years. Plan 1 will be amended to reduce benefits by €160,000 (in exchange, employees will receive increased contributions to the company’s defined contribution plan). Employees in this plan have an average period to vesting of 5 years. What is the total past service cost included in pension expense 2016?

a. €43,455 b. €158,000 c. €36,933 d. €21,000

84. Willshire Ltd. is evaluating amendments to its pensions plans. Plan 1 covers its salaried employees and Plan 2 provides benefits to its hourly workers. On January 1, 2016, Willshire will grant employees in Plan 2 additional pension benefits of £240,000 based on their past service. Employees in this plan have an average period to vesting of 8 years. Plan 1 will be amended to reduce benefits by £120,000 (in exchange, employees will receive increased contributions to the company’s defined contribution plan). Employees in this plan have an average period to vesting of 6 years. What is the total past service cost included in pension expense 2016?

a. €50,000 b. €120,000 c. €25,714 d. €10,000

(17)

Foster Corporation received the following report from its actuary at the end of the year:

December 31, 2015 December 31, 2016

Defined benefit obligation $1,600,000 $1,800,000

Fair value of pension plan assets 1,380,000 1,440,000 85. The amount reported as the pension liability at December 31, 2015 is

a. $ -0-. b. $200,000. c. $220,000. d. $360,000.

86. The amount reported as the pension liability at December 31, 2016 is a. $1,800,000

b. $1,600,000 c. $380,000 d. $360,000

Use the following information for questions 87 and 88. The following information relates to Jackson, Inc.:

For the Year Ended December 31, 2015 2016

Plan assets (at fair value) $1,260,000 $1,824,000

Pension expense 570,000 450,000

Defined benefit obligation 1,620,000 1,884,000

Annual contribution to plan 600,000 450,000

Past service costs 480,000 0

87. The amount reported as the liability for pensions on the December 31, 2015 statement of financial position is

a. $ -0-. b. $30,000. c. $360,000. d. $390,000.

88. The amount reported as the liability for pensions on the December 31, 2016 statement of financial position is

a. $ -0-. b. $60,000. c. $1,884,000. d. $520,000.

(18)

89. Presented below is information related to Noble Inc. as of December 31, 2016.

Net gain/loss $ 90,000

Defined benefit obligation 3,600,000

Vested benefits 1,620,000

Plan assets (at fair value) 3,384,000

The amount reported as the pension liability on Noble's statement of financial position at December 31, 2016 is as follows:

a. $ -0-. b. $90,000. c. $126,000. d. $216,000.

90. Presented below is pension information related to Waters Company as of December 31, 2016:

Defined benefit obligation $3,500,000

Net gain/loss 100,000

The amount to be reported as Pension Asset / Liability as of December 31, 2016 is a. Pension Liability of $200,000.

b. Pension Asset of $200,000. c. Pension Liability of $100,000. d. Pension Asset of $100,000.

Use the following information for questions 91 and 92. On January 1, 2016, Parks Co. has the following balances:

Fair value of plan assets 3,750,000

The discount rate is 10%. Other data related to the pension plan for 2016 are:

Past service costs 54,000

91. The balance of the defined benefit obligation at December 31, 2016 is a. $4,572,000.

b. $4,676,400. c. $4,629,000. d. $4,635,000.

92. The fair value of plan assets at December 31, 2016 is a. $3,531,000.

b. $3,789,000. c. $4,059,000. d. $4,284,000.

(19)

93. Huggins Company has the following information at December 31, 2016 related to its pension plan:

Plan assets (fair value) 4,200,000

The amount of pension asset / liability Huggins Company would recognize at December 31, 2016 is

a. Pension liability of $300,000. b. Pension asset of $1,000,000. c. Pension liability of $200,000. d. Pension asset of $200,000.

94. The following pension plan information is for Farr Company at December 31, 2016.

Past service costs 540,000

Pension expense for 2016 3,000,000

Contribution for 2016 2,400,000

The amount to be reported as the liability for pensions on the December 31, 2016 balance sheet is

a. $2,250,000. b. $1,950,000. c. $1,710,000. d. $1,050,000.

95. At December 31, 2016, Trafalgar Corporation had a defined benefit obligation of €510,000 which included €127,000 of past service costs, and plan assets of €322,000. Based on this information, what is the funded status of Trafalgar’s pension?

a. €322,000 b. €61,000 c. €188,000 d. €315,000

96. At December 31, 2016, Crosson Corporation had a defined benefit obligation of €620,000 which included €122,000 of past service costs, and plan assets of €347,000. Based on this information, what is the funded status of Crosson’s pension?

a. €347,000 b. €395,000 c. €273,000 d. €151,000

(20)

97. As a result of a discontinued operation, Wimbledon Ltd. is curtailing some benefits provided in its pension plan. It has the following data related to the plan.

Defined benefit obligation (Credit) €(1,500) Fair value of plan assets (Debit) 1,350

Pension asset/liability € (150)

The reduction results in a €180 reduction in the defined benefit obligation (there is no impact on the plan assets). The employees affected comprise 20% of all employees in the plan. What journal entry would be recorded for the curtailment by Wimbledon?

a. Pension Asset/Liability 170 Pension Expense 170 b. Pension Asset/Liability 180 Pension Expense 180 c. Pension Asset/Liability 30 Pension Expense 30 d. Pension Asset/Liability 210 Pension Expense 210

98. Guzman Company discontinues an operating segment, and employees of the discontinued segment will earn no further benefits. Using current actuarial assumptions (including current market interest rates and other current market prices) immediately before the curtailment, Guzman has a defined benefit obligation (000 omitted) with a net present value of €1,000, plan assets with a fair value of €820, and net cumulative actuarial gains of €50. The curtailment reduces the net present value of the obligation by €100 to €900. What was the effect of the curtailment?

a. €100 gain b. €180 loss c. €100 loss d. €95 gain

Multiple Choice Answers

—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

53. d 61. b 69. d 77. b 85. c 93. d 54. c 62. b 70. b 78. c 86. d 94. a 55. c 63. b 71. b 79. b 87. c 95. c 56. b 64. c 72. a 80. a 88. b 96. c 57. a 65. b 73. c 81. b 89. d 97. b 58. a 66. a 74. a 82. d 90. d 98. a 59. d 67. a 75. c 83. b 91. b 60. d 68. d 76. c 84. b 92. c

(21)

MULTIPLE CHOICE

—CPA Adapted

99. The following information pertains to Hopson Co.'s pension plan:

Actuarial estimate of defined benefit obligation at 1/1/16 $72,000

Assumed discount rate 10%

Service costs for 2016 $18,000

Pension benefits paid during 2016 $15,000

If no change in actuarial estimates occurred during 2016, Hopson's defined benefit obligation at December 31, 2016 was

a. $64,200. b. $75,000. c. $79,200. d. $82,200.

100. Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the

a. shortage between the expected and actual returns on plan assets. b. increase in the defined benefit obligation due to the passage of time. c. increase in the fair value of plan assets due to the passage of time. d. amortization of the discount on PSC.

101. Logan Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2016:

Defined benefit obligation $600,000

Fair value of plan assets 825,000

Past service cost 60,000

Expected return and interest revenue on plan assets 33,000

No contributions have been made for 2016 pension cost. In its December 31, 2016 statement of financial position, Logan should report a pension asset / liability of

a. Pension liability of $600,000 b. Pension asset of $824,000 c. Pension asset of $225,000 d. Pension liability of $525,000

102. Seigel Co. maintains a defined-benefit pension plan for its employees. At each statement of financial position date, Yeager should report a pension asset / liability equal to the a. accumulated benefit obligation.

b. defined benefit obligation. c. vested benefit obligation.

(22)

103. Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2016, the fair value of the plan assets is less than the vested benefit obligation. The defined benefit obligation exceeds the vested benefit obligation. In its balance sheet as of December 31, 2016, Ohlman should report a liability in the amount of the

a. excess of the defined benefit obligation over the fair value of the plan assets. b. excess of the vested benefit obligation over the fair value of the plan assets. c. defined benefit obligation.

d. vested benefit obligation.

104. At December 31, 2016, the following information was provided by the Vargas Corp. pension plan administrator:

Fair value of plan assets $4,500,000

What is the amount of the pension liability that should be shown on Vargas' December 31, 2016 statement of financial position?

a. $7,200,000 b. $2,700,000 c. $1,620,000 d. $1,080,000

Multiple Choice Answers

—CPA Adapted

Item Ans. Item Ans. Item Ans.

99. d 101. c 103. a

100. b 102. d 104. b

DERIVATIONS

— Computational

No. Answer

Derivation

53. d $72,000 + $54,000 – $18,000 = $108,000. 54. c $200,000 + ($2,400,000 × .10) – ($1,600,000 × .10) = $280,000. 55. c $900,000 + $390,000 + $165,000 – $180,000 = $1,275,000. 56. b $360,000 + $60,000 + ($4,860,000 × .10) – ($4,200,000 × .10) = $486,000. 57. a $100,000 – $5,000 + $60,000 - $83,950 = $71,050. 58. a $200,000 - $100,000 = $100,000. 59. d $800,000 + $362,500 – $230,000 + $150,000 = $1,082,500. 60. d $30,000 + $21,000 + $18,000 – $24,000 = $45,000. 61. b $840,000 + ($11,580,000 × .10) – ($6,000,000 × .10) + $180,000 = $1,578,000.

(23)

DERIVATIONS

— Computational (cont.)

No. Answer

Derivation

62. b ($9,900,000 – $9,000,000) – $1,260,000 + $1,125,000 = $765,000 63. b $800,000 – ($9,000,000 × .07) = $170,000. 64. c £195,000 – £110,000 = £85,000. 65. b £335,000 – £245,000 =£90,000. 66. a £433,000 – £265,000 = £168,000. 67. a £61 – £52 = £9cr 68. d £90,000 + (£910,000 × .09) – £63,900 + £100,000 = £208,000. 69. d £95,000 + (£1,010,000 × .08) – £64,800 + £100,000 = £211,000. 70. b €250,000 + €27,500 + (€250,000 × .10) – €17,500 = €285,000. 71. b €215,000 + €22,500 + (€215,000 × .10) – €19,500 = €239,500. 72. a €250,000 + €25,000 + €20,000 – €17,500 = €277,500. 73. c £215,000 + £28,000 + £22,000 – £18,500 = £246,500 74. a $2,100,000 + $180,000 + ($2,160,000 × .10) + $60,000 – $18,000 – $105,000 = $2,433,000. 75. c $1,800,000 + $237,000 + $300,000 – $105,000 = $2,232,000. 76. c $5,976,000 × .11 = $657,360. 77. b ($6,888,000 – $6,240,000) – ($756,000 – $564,000) = $456,000. 78. c $456,000 – ($6,240,000 × .11) = $230,400 loss. 79. b ($6,240,000 – $5,976,000) × .11 = $29,040 gain. 80. a £105,000 + £315,000 = £420,000. 81. b £416,000 + £104,000 = £520,000. 82. d €225,000. 83. b (€318,000 – €160,000) = €158,000. 84. b (£240,000 – £120,000) = £120,000. 85. c $1,600,000 – $1,380,000 = $220,000.

(24)

86. d $1,800,000 – $1,440,000 = $360,000. 87. c $1,620,000 – $1,260,000 = $360,000. 88. b $1,884,000 – $1,824,000 = $60,000. 89. d $3,600,000 – $3,384,000 = $216,000. 90. d $3,600,000 – $3,500,000 = $100,000 pension asset. 91. b $4,200,000 + $240,000 – $225,000 + ($4,254,000 × .10) + $54,000 – $18,000 = $4,676,400. 92. c $3,750,000 + $264,000 + $270,000 – $225,000 = $4,059,000. 93. d $4,200,000 – $4,000,000 = $200,000 (Asset). 94. a $8,400,000 – $6,150,000 = $2,250,000. 95. c €510,000 – €322,000 = €188,000. 96. c €620,000 – .€347,000 = €273,000. 97. b €180. 98. a €100 gain.

DERIVATIONS

— CPA Adapted

No. Answer

Derivation

99. d $72,000 + $18,000 + ($72,000 × .10) – $15,000 = $82,200. 100. b Conceptual. 101. c $825,000 - $600,000 = $225,000. 102. d Conceptual. 103. a Conceptual. 104. b $7,200,000 – $4,500,000 = $2,700,000.

(25)

EXERCISES

Ex. 20-105—Pension accounting terminology.

Briefly explain the following terms: (a) Service cost

(b) Interest cost (c) Past service cost (d) Vested benefits

Solution 20-105

(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 defined

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 defined 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 past service cost. The amount of past 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. 20-106—Pension assets.

Discuss the following ideas related to pension assets: (a) Actual return on plan assets.

(b) Interest revenue on plan assets. (c) Gains and losses on plan assets.

Solution 20-106

(a) 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.

(b) The interest revenue on plan assets is found by multiplying the discount rate by the fair value of plan assets at the beginning of the period.

(c) An interest revenue asset gain occurs when the actual return on plan assets is greater than the interest revenue on plan assets and a loss occurs when the actual return is less than the interest revenue.

(26)

Ex. 20-107—Measuring and recording pension expense.

Kessler, 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, 2016:

January 1, 2016 December 31, 2016

Fair value of plan assets 1,250,000 1,600,000

The service cost component for 2016 is $150,000 and past service cost is $240,000 (plan amendment effective January 1, 2016). The company's actual funding of the plan in 2016 amounted to $510,000. The discount rate is 8%.

Instructions

(a) Determine the pension expense to be reported in 2016.

(b) Prepare the journal entry to record pension expense and the employers' contribution to the pension plan in 2016.

Solution 20-107

(a) Service cost $150,000

Interest on defined benefit obligations ($2,740,000 × 8%) 219,200 Interest revenue on plan assets ($1,250,000 × 8%) (100,000)

Pension expense—2016 $509,200

(b) Pension Expense ... 509,200 Pension Asset / Liability ... 800

Cash ... 510,000

Ex. 20-108—Measuring and recording pension expense.

Presented below is information related to Jones Department Stores, Inc. pension plan for 2016.

Funding contribution for 2016 500,000

Discount rate 10%

Past service costs (due to benefit increase as of January 1, 2016) 100,000 Defined benefit obligation (at beginning of period) 480,000 Fair value of plan assets (at beginning of period) 360,000

Instructions

(a) Compute the amount of pension expense to be reported for 2016. (Show computations.) (b) Prepare the journal entry to record pension expense and the employer's contribution for

(27)

Solution 20-108

Interest on defined benefit obligation ($580,000 × 10%) 58,000 Expected return on plan assets ($360,000 × 10%) (36,000) Past service costs (plan amendment effective January 1, 2016) 100,000

Pension expense—2016 $642,000

(b) Pension Expense... 642,000

Cash... 500,000 Pension Asset / Liability... 142,000

Ex. 20-109— Recording pension asset / liability.

Miles Co. had the following selected balances at December 31, 2016:

Instructions

Calculate the pension asset / liability to be recorded at December 31, 2016.

Solution 20-109

$4,700,000 – $ 4,340,000 = $360,000 pension liability.

Ex. 20-110—Pension plan calculations.

The following information is for the pension plan for the employees of Payne, Inc. 12/31/15 12/31/16 Defined benefit obligation $3,040,000 $4,000,000 Fair value of plan assets 3,080,000 3,520,000

Discount rate 8% 8%

Payne estimates that the average remaining service life is 15 years. Payne's contribution was $520,000 in 2016 and benefits paid were $280,000.

Instructions

(a) Calculate the interest cost for 2016.

(b) Calculate the actual return on plan assets in 2016. (c) Calculate the gain or loss in 2016.

(28)

Solution 20-110

(a) $3,040,000 × 8% = $243,200

(b) Fair value of plan assets (12/31/16) $3,520,000 Fair value of plan assets (1/1/16) (3,080,000)

440,000

Contributions (520,000)

Actual return on plan assets $ 200,000

(c) Actual return (see b.) $ 200,000

Interest revenue ($3,080,000 × 8%) (246,400)

Loss on plan assets $ (46,400)

Ex. 20-111—Pension plan calculations and entries.

Selected Information about the pension plan of Roman Co. is as follows:

12/31/15 12/31/16

Past service costs (Plan amendment January 1, 2016) 500,000

Fair value of plan assets 4,650,000 4,800,000

Pension expense 1,000,000 1,420,000

Contribution 985,000 1,350,000

Instructions

(a) Calculate the pension asset / liability at December 31, 2016.

(b) Prepare the entry for 2016 to record the pension expense and contribution.

Solution 20-111

(a) Defined benefit obligation $5,020,000

Fair value of plan assets (4,800,000)

Pension asset / liability $ 220,000

(b) Pension Expense... 1,420,000

Cash... 1,350,000 Pension Asset / Liability... 70,000

(29)

Ex. 20-112—Pension plan calculations and journal entry.

On January 1, 2016, McGee Co. had the following balances:

Other data related to the pension plan for 2016:

Contributions to the plan 459,000

Discount rate 6%

Instructions

(a) Determine the defined benefit obligation at December 31, 2016. There are no net gains or losses.

(b) Determine the fair value of plan assets at December 31, 2016. (c) Calculate pension expense for 2016.

(d) Prepare the journal entry to record pension expense and the contributions for 2016.

Solution 20-112

(a) Defined benefit obligation, January 1 $7,200,000

Interest cost (6% × $7,200,000) 432,000

Benefits paid (450,000)

Defined benefit obligation, December 31 $7,497,000 (b) Fair value of plan assets, January 1 $7,200,000

Actual return 432,000

Benefits paid (450,000)

Fair value of plan assets, December 31 $7,641,000

(c) Service cost $315,000

Interest cost (6% × $7,200,000) 432,000

Actual (and expected) return on plan assets (432,000)

Pension expense $315,000

(d) Pension Expense……… 315,000

Pension Asset / Liability... 144,000

(30)

PROBLEMS

Pr. 20-113—Measuring, recording, and reporting pension expense and liability.

Tucker, Inc. on January 1, 2016 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 average remaining service life per employee is 12 years. An actuarial consulting firm has indicated that the present value of the defined benefit obligation on January 1, 2016 was $5,040,000. On December 31, 2016 the following information was provided concerning the pension plan's operations for its first year.

Employer's contribution at end of year $1,600,000

Discount rate 8%

Instructions

(a) Compute the pension expense recognized in 2016.

(b) Prepare the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2016.

(c) Indicate the amounts that are reported on the income statement and the statement of financial position for 2016.

Solution 20-113

(a) Service cost $ 600,000

Past service cost 5,040,000

Interest on defined benefit obligation ($5,040,000 × 8%) 403,200

Pension expense—2016 $6,043,200

(b) Pension Expense... 6,043,200

Pension Asset / Liability... 4,443,200 Cash... 1,600,000 (c) Income statement

Pension Expense $6,043,200

Statement of Financial Position

Liabilities

(31)

Pr. 20-114—Measuring and recording pension expense.

Presented below is information related to the pension plan of Zimmer Inc. for the year 2016. 1. The service cost related to pension expense is $240,000 using the defined benefits approach. 2. The defined benefit obligation and plan assets at the beginning of the year are $300,000 and

$80,000, respectively. The discount rate is 10%.

3. The plan was modified on January 1, 2016 resulting in past service cost of $140,000. 4. The contribution made to the pension fund in 2016 was $231,000.

Instructions

(a) Determine the pension expense to be reported on the income statement for 2016. (Round all computations to nearest dollar.)

(b) Prepare the journal entry(ies) to record pension expense for 2016.

Solution 20-114

Interest on defined benefit obligation [10% × ($300,000 + $140,000)] 44,000 Interest revenue on plan assets (10% × $280,000) (28,000)

Pension expense $396,000

(b) Pension Expense... 396,000

Pension Asset / Liability... 165,000 Cash... 231,000

Pr. 20-115—Preparing a pension work sheet.

The accountant for Marlin Corporation has developed the following information for the company's defined-benefit pension plan for 2016:

Annual contribution to the plan 900,000

Past service cost, effective January 1, 2016 105,000

Benefits paid to retirees 60,000

Discount rate 10%

Accumulated OCI—Gain/Loss, January 1, 2016 0%

Instructions

(a) Using the above information for Marlin Corporation, complete the pension work sheet for 2016. Indicate (credit) entries by parentheses. Calculated amounts should be supported. (b) Prepare the journal entry to reflect the accounting for the company's pension plan for the

(32)

Pension Work Sheet—2016

——————————————————————————————————————————————————————————

General Journal Entries Memo Entries

—————————————————————————————————————————————————————————

Annual Defined

Pension OCI Pension Asset/

Plan

Expense Cash Gain/Loss Liability Obligation Assets

——————————————————————————————————————————————————————————

Bal., Dec. 31, 2015 (1,000,000) (3,750,000) 2,750,000

—————————————————————————————————————————————————————————— Past Service Cost

—————————————————————————————————————————————————————————— Adjusted Bal. —————————————————————————————————————————————————————————— Service Cost —————————————————————————————————————————————————————————— Interest Expense —————————————————————————————————————————————————————————— Interest Revenue —————————————————————————————————————————————————————————— Asset Gain/Loss —————————————————————————————————————————————————————————— Contributions —————————————————————————————————————————————————————————— Benefits —————————————————————————————————————————————————————————— Journal entry for 2016 ________ Balance, Dec. 31, 2016 - 36 Te st B an k fo r I n te rm e d ia te A cc o u n tin g : I F R S E d iti o n

(33)

——————————————————————————————————————————————————————————

General Journal Entries Memo Entries

—————————————————————————————————————————————————————————

Annual Defined

Pension OCI Pension Asset/

Plan

——————————————————————————————————————————————————————————

Bal., Dec. 31, 2015 (1,000,000) (3,750,000) 2,750,000

——————————————————————————————————————————————————————————

Past Service Cost 105,000 (105,000)

—————————————————————————————————————————————————————————— Adjusted Bal. (3,855,000) —————————————————————————————————————————————————————————— Service Cost 500,000 (500,000) —————————————————————————————————————————————————————————— Interest Expense (1) 385,500 (385,000) —————————————————————————————————————————————————————————— Interest Revenue (2) (275,000) 275,000 —————————————————————————————————————————————————————————— Asset Gain/Loss (3) 15,000 (15,000) —————————————————————————————————————————————————————————— Contributions (900,000) 900,000 —————————————————————————————————————————————————————————— Benefits 60,000 (60,000) —————————————————————————————————————————————————————————— Journal entry 715,500 (900,000) 15,000 169,500 for 2016

Accumulated OCI, Jan. 1 0

Balance, Dec. 31, 2016 15,000 (830,500) (4,680,500) 3,850,000 A cc o u nti n g f or P e ns io n s a_n d P os tre tir e m e nt B en efi ts 20 -3 7

(34)

Solution 20-115 (cont.)

(1) ($3,750,000 + $105,000) × 10% = $385,500 (2) $2,750,000 × 10% = $275,000

(3) $260,000 – ($2,750,000 × 10%) = $15,000

(b) Pension Expense... 715,500 Pension Asset / Liability... 169,500 OCI—Gain/Loss... 15,000

Cash... 900,000

Pr. 20-116 – Pension Worksheet – Missing Amounts

The accounting staff of Elias Inc. has prepared the following pension worksheet. Unfortunately, several entries in the worksheet are not readable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2016.

General Journal Entries Memo Record

Items

Annual Pension

Expense Cash Gain/LossOCI—

Pension Asset/ Liability

Defined Benefit

Obligation AssetsPlan Balance, Jan. 1, 2016 1,700 (4,200) 2,500 PSC (1) (1) Adj. Bal. (5,000) Service cost (2) (600) Interest expense (3) (500) Interest revenue (4) (5) Asset gain/loss 25 (6) Contributions (1,200) 1,200 Benefits 300 (300) Liability increase (7) Journal entry (8) (9) (10) (11) Acc. OCI, Jan. 1, 2016 Balance, Dec. 31, 2016 (12) 1,585 5,465 3,880 Instructions

(a) Determine the missing amounts in the 2016 pension worksheet, indicating whether the

amounts are debits or credits.

(35)

SOLUTION 20-116

(a) Below is the completed worksheet, indicating debit and credit entries.

General Journal Entries Memo Record

Items

Annual Pension

Expense Cash Gain/LossOCI—

Pension Asset/ Liability

Defined Benefit

Obligation AssetsPlan Balance, Jan. 1, 2016 (1,700) (4,200) 2,500 PSC 800 (800) Adj. Bal. (5,000) Service cost 600 (600) Interest expense 500 (500) Interest revenue (250) 250 Asset gain/loss 25 (25) Contributions (1,200) 1,200 Benefits 300 (300) Liability increase 545 (545) Journal entry 1,650 (1,200) 570 (1,020) Acc. OCI, Jan. 1, 2016 0 Balance, Dec. 31, 2016 570 (2,720) 6,345 3,625 (b) Pension Expense... 1,650 OCI—Gain/Loss... 570 Pension Asset/Liability... 1,020 Cash... 1,200

(36)

Test Bank for Intermediate Accounting: IFRS Edition Pr. 20-117 - Pension Worksheet

Howard Corp. sponsors a defined-benefit pension plan for its employees. On January 1, 2016, the following balances related to this plan.

Plan assets (fair value) $450,000 Defined benefit obligation 600,000 Pension asset/liability 10,000 Cr.

As a result of the operation of the plan during 2016, the actuary provided the following additional data at December 31, 2016.

Service cost for 2016 $ 75,000

Actual return on plan assets in 2016 45,000 Past service cost, effective Jan. 1 120,000

Contributions in 2016 115,000

Benefits paid retirees in 2016 70,000

Discount rate 8%

Average remaining service life of active employees 10 years

Instructions

(a) Compute pension expense for Howard Corp. for the year 2016 by preparing a pension worksheet.

(37)

—————————————————————————————————————————————————————————

General Journal Entries Memo Record

—————————————————————————————————————————————————————————

Annual Defined

Pension OCI Pension Asset/ Benefit Plan

——————————————————————————————————————————————————————————

Balance Jan. 31, 2016 150,000 Cr. 600,000 Cr. 450,000 Dr.

——————————————————————————————————————————————————————————

Past Service Cost 120,000 Dr. 120,000 Cr.

——————————————————————————————————————————————————————————

Adjusted Bal., Jan 1 720,000 Cr.

—————————————————————————————————————————————————————————— Service cost 75,000 Dr. 75,000 Cr. —————————————————————————————————————————————————————————— Interest expense* 57,000 Dr. 57,600 Cr. —————————————————————————————————————————————————————————— Interest revenue** 36,000 Cr. 36,000 Dr. —————————————————————————————————————————————————————————— Asset gain*** 9,000 Cr. 9,000 Dr. —————————————————————————————————————————————————————————— Contributions 115,000 Cr. 115,000 Dr. —————————————————————————————————————————————————————————— Benefits 70,000 Dr. 70,000 Cr. —————————————————————————————————————————————————————————— Journal entry 216,000 Dr. 115,000 Cr. 9,000 Cr. 92,600 Cr. for 2016

Accumulated OCI, Jan. 1

Balance, Dec. 31, 2016 242,600 Cr. 782,600 Cr. 540,000 Dr. *$57,600 = $720,000  .08. **$36,000 = $450,000  .08. ***$9,000 = ($450,000  .08) – $45,000. A cc o u nti n g f or P e ns io n s a_n d P os tre tir e m e nt B en efi ts 20 -4 1

(38)

SOLUTION 20-117 (Continued) (b) Pension Expense... 216,600 Pension Asset/Liability... 92,600 Cash... 115,000 OCI—Gain/Loss... 9,000