ch20-11

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CHAPTER 20

ACCOUNTING FOR PENSIONS

AND POSTRETIREMENT BENEFITS

MULTIPLE CHOICE

—Conceptual

Answer No.

Description

d 1. Factors considered by actuaries. c 2. Process of funding a pension plan. d 3. Accounting problems in pension plans. c 4. Nature of a defined contribution plan. b 5. Nature of a defined benefit plan.

a 6. Definition of accumulated benefit obligation.

a 7. Projected benefit obligation as a measure of pension obligation. d 8. Alternative measures of the pension obligation.

d 9. Characteristics of vested benefits.

d 10. Pension funding and pension expense recognition. a 11. Components of pension expense.

c 12. Service cost calculated using future compensation levels. b 13. Settlement interest rates.

a 14. Nature of plan assets.

b 15. Definition of actual return on plan assets. b 16. Prepaid/accrued pension cost.

a 17. Recognition of prior service costs. c 18. Amortization of prior service costs.

b 19. Amortization methods for prior service costs. b 20. Recording unrecognized gains and losses. a 21. Use of market-related asset values.

a 22. Gain or loss caused by a plant closing.

c 23. Switch from a defined benefit plan to a defined contribution plan. b 24. Recognition of a minimum liability.

b 25. Intangible asset—deferred pension cost. a 26. Identification of a balance sheet account. b 27. Disclosures of pension plan information.

c 28. Function of Pension Benefit Guaranty Corporation. c *29. Disclosures of postretirement benefits.

b *30. Transition amount. a *31. Postretirement benefits.

c *32. Postretirement health care benefits. d *33. Accrual period.

b *34. Expected postretirement benefit obligation. c *35. Transition amount.

d *36. Item not recognized.

(2)

MULTIPLE CHOICE

—Computational

Answer No.

Description

d 37. Calculate pension expense to be recognized. c 38. Calculate pension expense.

a 39. Calculate pension expense for the period. b 40. Calculate pension expense to be recognized. c 41. Determine pension expense to be recognized. a 42. Calculate intangible asset to be reported. b 43. Calculate total pension liability to be reported. a 44. Calculate total pension liability.

c 45. Calculate total pension liability reflecting minimum liability. c 46. Calculate minimum liability.

b 47. Calculate amount of intangible asset. b 48. Calculate minimum liability.

c 49. Calculate amount of intangible asset. b 50. Calculate minimum liability to be reported. a 51. Calculate intangible asset to be reported. d 52. Calculate total pension liability to be reported. d 53. Calculate amount of intangible asset to be reported. b 54. Calculate amortization of prior service cost.

c 55. Calculate accrued pension cost recognized in the balance sheet. d 56. Determine balance of projected benefit obligation.

c 57. Determine fair value of plan assets. c 58. Calculate interest cost.

b 59. Determine actual return on plan assets. b 60. Calculate the unexpected gain on plan assets. a 61. Determine the corridor.

a 62. Calculate amortization of unrecognized net gain. b *63. Calculate postretirement expense.

b *64. Calculate postretirement expense. b *65. Calculate postretirement expense.

MULTIPLE CHOICE

—CPA Adapted

Answer No.

Description

d 66. Determine the projected benefit obligation. b 67. Nature of interest cost.

a 68. Calculate prepaid pension cost. c 69. Determine the accrued pension cost. a 70. Calculate prepaid pension cost.

c 71. Calculate the minimum pension liability. c 72. Minimum liability of a defined benefit plan. b 73. Minimum liability of a defined benefit plan.

d 74. Determine the amount of pension liability to be reported.

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EXERCISES

Item

Description

E20-76 Pension accounting terminology. E20-77 Pension assets.

E20-78 Measuring and recording pension expense. E20-79 Additional pension liability.

E20-80 Pension plan calculations and journal entries. E20-81 Pension plan calculation and entries.

E20-82 Corridor amortization.

E20-83 Corridor approach amortization of net gains and losses. E20-84 Pension reconciliation schedule.

E20-85 Pension plan calculations.

E20-86 Measuring and recording pension expense. *E20-87 Computing and recording postretirement expense. *E20-88 Computing postretirement expense and APBO.

PROBLEMS

Item

Description

P20-89 Measuring and recording pension expense. P20-90 Preparing a pension work sheet.

P20-91 Amortization of prior service cost.

P20-92 Measuring, recording, and reporting pension expense and liability.

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 alternative measures for valuing the pension obligation. 4. Identify the components of pension expense.

5. Utilize a work sheet for employer's pension plan entries. 6. Describe the amortization of unrecognized prior service costs.

7. Explain the accounting procedure for recognizing unexpected gains and losses. 8. Explain the corridor approach to amortizing unrecognized gains and losses. 9. Explain the recognition of a minimum liability.

10. Describe the reporting requirements for pension plans in financial statements. *11. Identify the differences between pensions and postretirement health care benefits. *12. Contrast accounting for pensions to accounting for other postretirement benefits.

(4)

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. MC 2. MC Learning Objective 2 3. MC 4. MC 5. MC Learning Objective 3 6. MC 7. MC 8. MC 9. MC 76. E 92. P Learning Objective 4 10. MC 14. MC 38. MC 59. MC 69. MC 86. E 11. MC 15. MC 44. MC 66. MC 76. E 89. P 12. MC 16. MC 55. MC 67. MC 77. E 92. P 13. MC 37. MC 58. MC 68. MC 78. E Learning Objective 5 90. P Learning Objective 6 17. MC 19. MC 40. MC 43. MC 75. MC 84. E 91. P 18. MC 39. MC 41. MC 54. MC 79. E 89. P Learning Objective 7 60. MC 77. E 85. E 90. P 92. P Learning Objective 8 20. MC 23. MC 61. MC 82. E 85. E 21. MC 41. MC 62. MC 83. E 86. E 22. MC 43. MC 81. E 84. E 89. P Learning Objective 9 24. MC 45. MC 50. MC 57. MC 74. MC 85. E 25. MC 46. MC 51. MC 70. MC 79. E 86. E 26. MC 47. MC 52. MC 71. MC 80. E 89. P 42. MC 48. MC 53. MC 72. MC 81. E 90. P 43. MC 49. MC 56. MC 73. MC 84. E 92. P Learning Objective 10 27. MC 28. MC Learning Objective *11 32. MC Learning Objective *12 29. MC 31. MC 34. MC 36. MC 64. MC 87. E 30. MC 33. MC 35. MC 63. MC 65. MC 88. E

Note: MC = Multiple Choice E = Exercise

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MULTIPLE CHOICE

—Conceptual

1. In determining the present value of the prospective benefits (often referred to as the projected 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 factors.

2. In a defined benefit plan, the process of funding refers to a. determining the projected benefit obligation.

b. determining the accumulated benefit obligation.

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

d. determining the amount that might be reported for pension expense. 3. 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. 4. 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. 5. 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 to 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.

6. 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.

(6)

7. The projected 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 generally accepted accounting principles for reporting the service cost component of pension expense.

8. 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.

9. 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.

10. 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. 11. The computation of pension expense includes all the following except

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

c. expected return on plan assets.

d. All of these are included in the computation.

12. In computing the service cost component of pension expense, the FASB 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 projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

d. all of these.

13. The interest on the projected 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 as the expected return on plan assets.

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14. One component of pension expense is expected return 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 balance sheet of the employer as prepaid pension cost. d. none of these.

15. 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 market value of the fund assets. c. is equal to the actual rate of return times the fair value of the plan assets at the

beginning of the period. d. all of these.

16. 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 prior service cost. b. accrued or prepaid pension cost.

c. an accrued actuarial liability.

d. a charge or credit to unrealized appreciation and depreciation.

17. When a company adopts a pension plan, the prior service costs should be charged to a. operations of current and future periods.

b. operations of prior periods. c. operations of the current period. d. retained earnings.

18. When a company amends a pension plan, for accounting purposes, prior service cost 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. amortized under accrual accounting to current and future periods benefited. d. treated as an expense of the period during which the funding occurs. 19. Prior 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 15 years.

d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.

20. Unrecognized gains and losses that relate to the computation of pension expense should be

a. recorded currently as an adjustment to pension expense in the period incurred.

b. recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

c. amortized over a 15-year period. d. recorded only if a loss is determined.

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21. Market-related asset value is used to determine the corridor and to calculate the expected return on plan assets.

Expected Return

Corridor on Plan Assets

a. Yes Yes

b. Yes No

c. No Yes

d. No No

22. A pension fund gain or loss that is caused by a plant closing should be a. recognized immediately as a gain or loss on the plant closing. b. spread over the current year and future years.

c. charged or credited to the current pension expense. d. recognized as a prior period adjustment.

23. When a company switches from a defined benefit to a defined contribution plan, any gain arising must generally be reported

a. in the current and prospective periods on a straight-line basis. b. as a prior period adjustment.

c. currently as a gain.

d. in the current and prospective periods on a declining-balance method over the average remaining service life of existing employees.

24. A minimum liability for pension expense is reported when

a. the projected benefit obligation exceeds the fair value of pension plan assets. b. the accumulated benefit obligation exceeds 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. vested benefits exceed the fair value of pension plan assets. 25. An intangible asset (deferred pension cost) is created when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets, but accrued pension cost and unrecognized prior service cost is greater than this excess. b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but

accrued pension cost is less than this excess, and unrecognized prior service cost exists.

c. pension plan assets at fair value exceed the accumulated benefit obligation. d. pension plan assets at book value exceed the projected benefit obligation. 26. Which of the following statements is correct?

a. There is an account titled Additional Pension Liability. b. There is an account titled Minimum Pension Liability.

c. Accrued pension cost and additional pension liability should be reported separately on the balance sheet.

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27. Which of the following disclosures of pension plan information would not normally be required by Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits”?

a. The major components of pension expense

b. The amount paid from the pension fund to retirees during the period

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

28. The main purpose of the Pension Benefit Guaranty Corporation is to a. require minimum funding of pensions.

b. require plan administrators to publish a comprehensive description and summary of their plans.

c. administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.

d. all of these.

*29. Which of the following disclosures of postretirement benefits would not be required by professional pronouncements?

a. Postretirement expense for the period

b. A schedule showing changes in postretirement benefits and plan assets during the year c. The amount of the actuarial liability for postretirement benefits

d. The assumptions and rates used in computing the EPBO and APBO

*30. At the beginning of the year of adoption of Statement of Financial Accounting Standards

No. 106, a transition amount is computed as the excess of the

a. expected postretirement benefit obligation over the fair value of plan assets or vice versa.

b. accumulated postretirement benefit obligation over the fair value of plan assets or vice versa.

c. expected postretirement benefit obligation over the fair value of plan assets, but not vice versa.

d. accumulated postretirement benefit obligation over the fair value of plan assets, but not vice versa.

*31. Postretirement benefits may include all of the following except a. severance pay to laid-off employees.

b. dental care.

c. legal and tax services. d. tuition assistance.

*32. Which of the following statements is true about postretirement health care benefits? a. They are generally funded.

b. The benefits are well-defined and level in dollar amount. c. The beneficiary is the retiree, spouse, and other dependents. d. The benefit is payable monthly.

*33. Which of the following statements is correct?

a. The period over which postretirement benefits are accrued is called the attribution period.

b. The accrual period generally begins when an employee is hired.

c. The accrual period generally ends on the date the employee is eligible to receive the benefits and ceases to earn additional benefits.

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*34. Which of the following statements about the expected postretirement benefit obligation (EPBO) is not correct?

a. The EPBO is an actuarial present value. b. The EPBO is recorded in the accounts.

c. The EPBO is used in measuring periodic expense. d. All of these are correct.

*35. Which of the following statements about the immediate recognition of a transition amount is not correct?

a. The transition amount is recognized in the income statement as the effect of a change in accounting principle.

b. The transition amount is recognized in the income statement net of tax. c. Restatement of previously issued annual financial statements is permitted. d. The transition amount is recognized in the balance sheet as a long-term liability.

*36. Which of the following is a significant item not recognized in the accounts and in the financial statements?

a. Accumulated postretirement benefit obligation b. Postretirement benefit plan assets

c. Expected postretirement benefit obligation d. All of these.

Multiple Choice Answers

—Conceptual

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

1. d 7. a 13. b 19. b 25. b *31. a 2. c 8. d 14. a 20. b 26. a *32. c 3. d 9. d 15. b 21. a 27. b *33. d 4. c 10. d 16. b 22. a 28. c *34. b 5. b 11. a 17. a 23. c 29. c *35. c 6. a 12. c 18. c 24. b 30. b *36. d

MULTIPLE CHOICE

—Computational

37. Presented below is pension information related to Tyler, Inc. for the year 2004:

Service cost $96,000

Interest on projected benefit obligation 72,000

Interest on vested benefits 32,000

Amortization of prior service cost due to increase in benefits 16,000

Expected return on plan assets 24,000

The amount of pension expense to be reported for 2004 is a. $144,000.

b. $192,000. c. $216,000. d. $160,000.

(11)

38. Koble, Inc. sponsors a defined benefit pension plan. The following data relates to the operation of the plan for the year 2004.

Service cost $ 150,000

Contributions to the plan 165,000

Actual return on plan assets 135,000

Projected benefit obligation (beginning of year) 1,800,000 Market-related and fair value of plan assets (beginning of year) 1,200,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2004 is

a. $150,000. b. $195,000. c. $210,000. d. $330,000.

39. Presented below is information related to Marley Inc. pension data for 2004.

Service cost $1,200,000

Interest on projected benefit obligation 520,000 Amortization of unrecognized net loss 120,000 Amortization of unrecognized prior service cost 220,000

Expected return on plan assets 240,000

What amount should be reported for pension expense in 2004? a. $1,820,000.

b. $1,780,000. c. $2,020,000. d. $1,540,000.

40. Randel, 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

Market-related asset value $3,500,000 $3,750,000 Projected benefit obligation 4,000,000 4,300,000 Accumulated benefit obligation 700,000 850,000

Unrecognized net (gains) and losses -0- (75,000)

The service cost component of pension expense for 2004 is $300,000 and the amortization of unrecognized prior service cost is $50,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2004? a. $300,000.

b. $435,000. c. $442,500. d. $360,000.

(12)

Use the following information for questions 41 through 43. The following information for Nyland Enterprises is given below:

December 31, 2004 Assets and obligations

Plan assets (at fair value) $2,700,000

Market-related asset value 2,610,000

Accumulated benefit obligation 2,880,000

Projected benefit obligation 4,140,000

Amounts to be Recognized

Prepaid/(accrued) pension cost at beginning of year (72,000)

Pension expense (540,000)

Contribution 486,000

Prepaid/(accrued) pension cost at end of year $ (126,000)

Unrecognized prior service costs $ 618,750

Unrecognized gains (net) (315,000)

41. What is the pension expense that Nyland Enterprises should report for 2004? a. $486,000.

b. $180,000. c. $540,000. d. $378,000.

42. What is the amount that Nyland Enterprises should report as Intangible Asset—Deferred Pension Cost as of December 31, 2004?

a. $54,000. b. $180,000. c. $108,000. d. $ -0-.

43. What is the amount that should be reported as the total liability related to pensions as of December 31, 2004?

a. $54,000. b. $180,000. c. $108,000. d. $2,880,000.

Use the following information for questions 44 and 45.

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

December 31, 2004 December 31, 2005

Projected benefit obligation $4,800,000 $5,400,000

Market-related asset value 4,200,000 4,260,000

Accumulated benefit obligation 3,900,000 4,440,000 Fair value of pension plan assets 4,140,000 4,320,000

Prepaid pension cost 240,000 300,000

(13)

44. The amount reported as the total pension liability at December 31, 2004 is a. $ -0-.

b. $600,000. c. $660,000. d. $900,000.

45. The amount reported as the total pension liability at December 31, 2005 is a. $ -0-.

b. $420,000. c. $120,000. d. $180,000.

Use the following information for questions 46 through 49. The following information relates to Haywood, Inc.:

For the Year Ended December 31, 2004 2005 Plan assets (at fair value) $ 840,000 $1,216,000

Pension expense 380,000 300,000

Accumulated benefit obligation 1,080,000 1,256,000

Annual contribution to plan 400,000 300,000

Unrecognized prior service cost 320,000 280,000

Prior to 2004, cumulative pension expense recognized equaled cumulative contributions.

46. The amount reported as the total liability for pensions on the December 31, 2004 balance sheet is

a. $ -0-. b. $20,000. c. $240,000. d. $260,000.

47. The amount reported as an intangible asset on the December 31, 2004 balance sheet is a. $ -0-.

b. $260,000. c. $240,000. d. $20,000.

48. The amount reported as the total liability for pensions on the December 31, 2005 balance sheet is

a. $ -0-. b. $40,000. c. $60,000. d. $20,000.

49. The amount reported as an intangible asset on the December 31, 2005 balance sheet is a. $ -0-.

b. $40,000. c. $60,000. d. $20,000.

(14)

Questions 50 and 51 relate to the information which follows:

Presented below is information related to Logan Inc. as of December 31, 2004. Unrecognized gains and losses $ 75,000

Vested benefits 1,350,000

Plan assets (at fair value) 2,820,000

Unrecognized prior service cost -0-

Assume that cumulative pension expense equaled pension funding through 2004.

50. The amount reported as the total pension liability on Logan's balance sheet at December 31, 2004 is as follows:

a. $ -0-. b. $30,000. c. $75,000. d. $180,000.

51. The amount reported as an intangible asset on Logan's balance sheet at December 31, 2004 is as follows:

a. $ -0-. b. $30,000. c. $75,000. d. $180,000.

52. Fargo Company has a defined benefit plan. At the end of 2004, it has determined the following information related to its pension plan:

Projected benefit obligation $2,100,000 Market-related asset value of pension plan 1,800,000 Accumulated benefit obligation 1,980,000

Accrued pension cost 105,000

Fair value of pension plan assets 1,830,000

The amount of the total pension liability that is reported in Fargo's balance sheet at the end of 2004 is

a. $300,000. b. $180,000. c. $75,000. d. $150,000.

53. Presented below is pension information related to Marten Company as of December 31, 2004:

Accumulated benefit obligation $ 6,000,000

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The amount to be reported as Intangible Asset—Deferred Pension Cost as of December 31, 2004 is a. $1,000,000. b. $2,000,000. c. $400,000. d. $200,000.

54. Bailey, Inc. has a defined benefit pension plan covering its 50 employees. Bailey agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $600,000. Bailey determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Bailey uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is

a. $120,000. b. $200,000. c. $60,000. d. $160,000.

55. Presented below is information related to Bitner Manufacturing Company as of December 31, 2004:

Projected benefit obligation in excess of plan assets $1,800,000

Unrecognized net gain $600,000

Unrecognized prior service cost $810,000

The amount to be reported as accrued pension cost at the end of 2004 is a. $ -0-.

b. $2,010,000. c. $1,590,000. d. $1,800,000.

Use the following information for questions 56 and 57. On January 1, 2004, Nen Co. has the following balances:

Projected benefit obligation $2,800,000

Fair value of plan assets 2,500,000

The settlement rate is 10%. Other data related to the pension plan for 2004 are:

Amortization of unrecognized prior service costs 36,000

Contributions 180,000

Benefits paid 150,000

Amortization of unrecognized net gain 12,000 56. The balance of the projected benefit obligation at December 31, 2004 is a. $3,048,000.

b. $3,060,000. c. $3,086,000. d. $3,090,000.

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57. The fair value of plan assets at December 31, 2004 is a. $2,354,000.

b. $2,526,000. c. $2,706,000. d. $2,856,000.

Use the following information for questions 58 through 62.

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

1/1/03 12/31/03 12/31/04

Accum. benefit obligation $4,400,000 $4,600,000 $6,000,000 Projected benefit obligation 4,650,000 4,980,000 6,670,000 Fair value of plan assets 4,250,000 5,200,000 5,740,000 Market-related value of assets 4,100,000 5,160,000 5,650,000 Unrecognized net (gain) or loss -0- (720,000) (800,000)

Settlement rate (for year) 11% 11%

Expected rate of return (for year) 8% 7%

Tempel estimates that the average remaining service life is 16 years. Tempel's contribution was $315,000 in 2004 and benefits paid were $235,000.

58. The interest cost for 2004 is a. $448,200.

b. $506,000. c. $547,800. d. $733,700.

59. The actual return on plan assets in 2004 is a. $340,000.

b. $380,000. c. $490,000. d. $540,000.

60. The unexpected gain or loss on plan assets in 2004 is a. $32,800 loss.

b. $18,800 gain. c. $127,200 gain. d. $178,800 gain. 61. The corridor for 2004 is a. $516,000. b. $520,000. c. $565,000. d. $667,000.

62. The amount of unrecognized net gain amortized in 2004 is a. $12,750.

b. $12,500. c. $9,688. d. $8,314.

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*63. The following facts relate to the Lional Co. postretirement benefits plan for 2004:

Discount rate 9%

APBO, January 1, 2004 $1,200,000

EPBO, January 1, 2004 $1,600,000

Benefit payments to employees $92,000

The amount of postretirement expense for 2004 is a. $136,000.

b. $244,000. c. $280,000. d. $336,000.

*64. The following facts relate to the postretirement benefits plan of Ramsey, Inc. for 2004:

Discount rate 8%

APBO, January 1, 2004 (transition amount) $3,000,000

EPBO, January 1, 2004 $3,600,000

Average remaining service to full eligibility 20 years Average remaining service to expected retirement 25 years The amount of postretirement expense for 2004 is

a. $630,000. b. $870,000. c. $900,000. d. $918,000.

*65. The following facts relate to the Albers Co. postretirement benefits plan for 2004:

Discount rate 10%

EPBO, January 1, 2004 $1,825,000

APBO, January 1, 2004 $1,500,000

Actual return on plan assets in 2004 $52,500 Expected return on plan assets in 2004 $40,000 The amount of postretirement expense for 2004 is

a. $307,500. b. $320,000. c. $352,500. d. $360,000.

Multiple Choice Answers

—Computational

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

37. d 42. a 47. b 52. d 57. c 62. a

38. c 43. b 48. b 53. d 58. c *63. b

39. a 44. a 49. c 54. b 59. b *64. b

40. b 45. c 50. b 55. c 60. b *65. b

(18)

MULTIPLE CHOICE

—CPA Adapted

66. The following information pertains to Denton Co.'s pension plan:

Actuarial estimate of projected benefit obligation at 1/1/04 $120,000

Assumed discount rate 10%

Service costs for 2004 $30,000

Pension benefits paid during 2004 $25,000

If no change in actuarial estimates occurred during 2004, Denton's projected benefit

obligation at December 31, 2004 was a. $107,000.

b. $125,000. c. $132,000. d. $137,000.

67. Interest cost included in the net pension cost 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 projected 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 unrecognized prior service cost.

68. On January 1, 2004, Prattt Corp. adopted a defined benefit pension plan. The plan's service cost of $350,000 was fully funded at the end of 2004. Prior service cost was funded by a contribution of $140,000 in 2004. Amortization of prior service cost was $56,000 for 2004. What is the amount of Pratt’s prepaid pension cost at December 31, 2004?

a. $84,000. b. $140,000. c. $196,000. d. $210,000.

69. Santo 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, 2004:

Service cost 480,000

Interest on projected benefit obligation 48,000 Amortization of unrecognized prior service cost 120,000 Expected and actual return on plan assets 165,000

The market-related asset value equals the fair value of plan assets. Prior contributions to the defined benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2004 pension cost. In its December 31, 2004 balance sheet, Santo should report an accrued pension cost of

a. $813,000. b. $648,000. c. $483,000. d. $435,000.

(19)

Use the following information for questions 70 and 71.

Heerey Co. provides retirement benefits to employees through a funded defined benefit pension plan. The company administering the plan provided the following information for the year ended December 31, 2004:

Plan assets at fair value $1,600,000

Pension expense 400,000

Employer's contribution, 12/1/04 480,000

Unrecognized prior service cost 40,000

On December 31, 2003, the accrued/prepaid pension cost account had a debit balance of $60,000. Assume that the fair value of the plan assets is equal to the market-related asset value. Prior to 2004, the fair value of plan assets exceeded the accumulated benefit obligation.

70. At December 31, 2004, what is the amount of prepaid pension cost? a. $140,000.

b. $120,000. c. $80,000. d. $20,000.

71. In Heerey's December 31, 2004 balance sheet, what is the amount of the minimum pension liability?

a. $40,000. b. $80,000. c. $180,000. d. $320,000.

72. Norton Co. maintains a defined benefit pension plan for its employees. At each balance sheet date, Norton should report a minimum liability at least equal to the

a. accumulated benefit obligation. b. projected benefit obligation.

c. unfunded accumulated benefit obligation. d. unfunded projected benefit obligation.

73. Jensen, Inc. maintains a defined benefit pension plan for its employees. As of December 31, 2004, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2004, Jensen should report a minimum liability in the amount of the

a. excess of the projected benefit obligation over the value of the plan assets. b. excess of the accumulated benefit obligation over the value of the plan assets. c. projected benefit obligation.

d. accumulated benefit obligation.

74. At December 31, 2004, the following information was provided by the Rivers Corp. pension plan administrator:

Fair value of plan assets $3,000,000

(20)

74. (cont.)

What is the amount of the pension liability that should be shown on Rivers' December 31, 2004 balance sheet?

a. $4,800,000. b. $1,800,000. c. $1,080,000. d. $720,000.

75. Effective January 1, 2004, Quayle Co. established a defined benefit plan with no retroactive benefits. The first of the required equal annual contributions was paid on December 31, 2004. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2004 and 2005 is the same. How should the service cost for 2005 compare with 2004, and should the 2004 balance sheet report an accrued or a prepaid pension cost?

Service Cost Pension Cost for 2005 Reported on the

Compared to 2004 2004 Balance Sheet

a. Equal to Accrued

b. Equal to Prepaid

c. Greater than Accrued

d. Greater than Prepaid

Multiple Choice Answers

—CPA Adapted

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

66. d 68. a 70. a 72. c 74. d

67. b 69. c 71. c 73. b 75. d

DERIVATIONS

— Computational

No. Answer Derivation

37. d $96,000 + $72,000 + $16,000 – $24,000 = $160,000. 38. c $150,000 + ($1,800,000 × .10) – ($1,200,000 × .10) = $210,000. 39. a $1,200,000 + $520,000 + $120,000 + $220,000 – $240,000 = $1,820,000. 40. b $300,000 + $50,000 + ($4,000,000 × .10) – ($3,500,000 × .09) = $435,000. 41. c $540,000. 42. a $2,880,000 – $2,700,000 = $180,000 $180,000 – $126,000 = $54,000. 43. b $54,000 + $126,000 = $180,000. 44. a FV of assets > ABO.

(21)

45. c $4,440,000 – $4,320,000 = $120,000. 46. c $1,080,000 – $840,000 = $200,000.

47. b $400,000 – $380,000 = $20,000 (prepaid pension cost) $240,000 + $20,000 = $260,000.

48. b $1,256,000 – $1,216,000 = $40,000. 49. c $300,000 – $300,000 = 0.

$40,000 + $20,000 (from prior year) = $60,000. 50. b $2,850,000 – $2,820,000 = $30,000.

51. a Unrecognized prior service cost is zero. 52. d $1,980,000 – $1,830,000 = $150,000.

53. d $6,000,000 – $5,000,000 – $600,000 = $400,000 (additional liability).

∴

additional liability > unrecognized prior service cost. Unrecognized prior service cost = $200,000.

54. b 50 + 40 + 30 + 20 + 10 = 150. $600,000 ÷ 150 = $4,000/service yr. $4,000 × 50 = $200,000. 55. c $1,800,000 + $600,000 – $810,000 = $1,590,000. 56. d $2,800,000 + $160,000 – $150,000 + ($2,800,000 × .10) = $3,090,000. 57. c $2,500,000 + $176,000 + $180,000 – $150,000 = $2,706,000. 58. c $4,980,000 × .11 = $547,800. 59. b ($5,740,000 – $5,200,000) – ($630,000 – $470,000) = $380,000. 60. b $380,000 – ($5,160,000 × .07) = $18,800. 61. a $5,160,000 × .10 = $516,000. 62. a ($720,000 – $516,000) ÷ 16 = $12,750. *63. b $136,000 + $108,000 = $244,000. *64. b $510,000 + $240,000 + $120,000 = $870,000. *65. b $210,000 + $150,000 – $52,500 + $12,500 = $320,000.

(22)

DERIVATIONS

— CPA Adapted

No. Answer Derivation

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.

(23)

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

(24)

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:

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

Minimum liability 160,000

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:

Other data related to the pension plan for 2004:

Service costs 140,000

Unrecognized prior service cost -0-

Contributions to the plan 224,000

Settlement rate 9%

(25)

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

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%

(26)

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

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.

(27)

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.

(28)

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

Vested benefit obligation 726,000

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 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%

(29)

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)

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

Funding contribution for 2004 375,000

Settlement rate used in actuarial computation 10%

Expected return on plan assets 9%

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

(30)

Solution 20-86

Interest on projected benefit obligation ($360,000 × 10%) 36,000 Expected return on plan assets ($270,000 × 9%) (24,300)

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:

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

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

(31)

*Ex. 20-88—Computing postretirement expense and APBO.

The following information is related to the postretirement benefits plan of Gordon, Inc. for 2004:

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

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

(32)

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

(33)

(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:

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

(34)

(35)

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

(36)

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 f

or Pensions

and Postretirement Ben

efits —————————————————————————————————————————————————————————— 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)

(37)

(38)

(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

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.

(39)

Solution 20-91 Computation of Service-Years Year Total 2003 40 120 60 160 20 400 2004 120 60 160 20 360 2005 60 160 20 240 2006 160 20 180 2007 20 20 40 240 180 640 100 1,200

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 2004 360 4,000 1,440,000 2005 240 4,000 960,000 2006 180 4,000 720,000 2007 20 4,000 80,000 1,200 $4,800,000

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

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.