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CHAPTER 20 (13e)Accounting for Pensions and Postretirement Benefits

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics QuestionsBrief

Exercises Exercises Problems

Conceptsfor Analysis

1. Basic definitions and concepts related to pension plans.

1, 2, 3, 4, 5, 6, 7, 8, 9, 12, 24, 30

16 1, 2, 3, 4, 5, 7

2. Worksheet preparation. 3 3, 4, 7, 10, 14, 15, 18

1, 2, 4, 7, 8, 9, 10, 11, 12

3. Income statement recognition, computation of pension expense.

9, 10, 11, 13, 16, 17

1, 2, 4 1, 2, 3, 6,11, 13, 14, 15, 16, 17, 18

1, 2, 3, 4, 5,6, 9, 11, 12

4, 5

4. Balance sheet recognition, computation of pension expense.

15, 19, 20, 22, 23

6, 10 3, 9, 11, 12, 13, 14

1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12

2, 5, 7

5. Corridor calculation. 18 7 8, 13, 14, 16, 17, 18

2, 3, 5, 6, 7, 8, 11, 12

3, 4, 5, 6

6. Prior service cost. 12, 13, 20 5, 6, 8 1, 2, 3, 5,9, 11, 12,13, 14

1, 2, 3, 4, 6, 7, 8, 9, 11, 12

1, 4

7. Gains and losses. 14, 17,21, 22

7, 9 8, 9, 13, 14, 16, 17

1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12

4, 5, 6

8. Disclosure issues. 23 10 9, 11, 12 11, 12 3, 4

9. Special Issues. 25

*10. Postretirement benefits. 30, 31,32, 33

11, 12 19, 20, 21, 22, 23, 24

13, 14

*This material is dealt with in an Appendix to the chapter.

Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 20-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives Brief Exercises Exercises Problems

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. List the components of pension expense. 1, 2, 4 1, 2, 6, 11, 12, 13, 15

5. Use a worksheet for employer’s pension plan entries.

3 3, 4, 7, 10, 11, 14, 18

1, 2, 4, 7, 8, 9, 10, 11, 12

6. Describe the amortization of prior service costs. 5 1, 2, 5, 7, 12, 13

1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12

7. Explain the accounting for unexpected gains and losses.

12, 13 1, 2, 3, 4, 5, 6, 7, 8, 9,10, 11, 12

8. Explain the corridor approach to amortizing gains and losses.

7 8, 12, 13, 16, 17, 18

3, 4, 5, 6, 8, 11, 12

9. Describe the requirements for reporting pension plans in financial statements.

6, 8, 9, 10 9, 11,12, 13 1, 2, 3, 4, 8, 11, 12

*10. Identify the differences between pensions and postretirement healthcare benefits.

11, 12 19, 20, 21, 22, 23, 24

13, 14

*11. Contrast accounting for pensions to accounting for other postretirement benefits.

11, 12 19, 20, 21,22, 23, 24

13, 14

20-2 Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE

Item DescriptionLevel ofDifficulty

Time (minutes)

E20-1 Pension expense, journal entries. Simple 5–10E20-2 Computation of pension expense. Simple 10–15E20-3 Preparation of pension worksheet. Moderate 15–25E20-4 Basic pension worksheet. Simple 10–15E20-5 Application of years-of-service method. Moderate 15–25E20-6 Computation of actual return. Simple 10–15E20-7 Basic pension worksheet. Moderate 15–25E20-8 Application of the corridor approach. Moderate 20–25E20-9 Disclosures: Pension expense and other comprehensive income. Moderate 25–35E20-10 Pension worksheet. Moderate 20–25E20-11 Pension expense, journal entries, statement presentation. Moderate 20–30E20-12 Pension expense, journal entries, statement presentation. Moderate 20–30E20-13 Computation of actual return, gains and losses, corridor test, and

pension expense.Complex 35–45

E20-14 Worksheet for E20-13. Complex 40–50E20-15 Pension expense, journal entries. Moderate 15–20E20-16 Amortization of accumulated OCI (G/L), corridor approach,

pension expense computation.Moderate 25–35

E20-17 Amortization of accumulated OCI balances. Moderate 30–40E20-18 Pension worksheet—missing amounts. Moderate 20–25

*E20-19 Postretirement benefit expense computation. Moderate 5–10*E20-20 Postretirement benefit worksheet. Moderate 25–30*E20-21 Postretirement benefit expense computation. Simple 10–12*E20-22 Postretirement benefit expense computation. Simple 10–12*E20-23 Postretirement benefit worksheet. Moderate 15–20*E20-24 Postretirement benefit worksheet—missing amounts. Moderate 25–30

P20-1 2-year worksheet. Moderate 40–50P20-2 3-year worksheet, journal entries, and reporting. Complex 45–55P20-3 Pension expense, journal entries, amortization of loss. Complex 40–50P20-4 Pension expense, journal entries for 2 years. Moderate 30–40P20-5 Computation of pension expense, amortization of net gain or

loss-corridor approach, journal entries for 3 years.Complex 45–55

P20-6 Computation of prior service cost amortization, pension expense, journal entries, and net gain or loss.

Complex 45–60

P20-7 Pension worksheet. Moderate 35–45P20-8 Comprehensive 2-year worksheet. Complex 45–60P20-9 Comprehensive 2-year worksheet. Moderate 40–45P20-10 Pension worksheet—missing amounts. Moderate 25–30P20-11 Pension worksheet. Moderate 35–45P20-12 Pension worksheet. Moderate 35–45

*P20-13 Postretirement benefit worksheet. Moderate 30–35*P20-14 Postretirement benefit worksheet—2 years. Moderate 40–45


ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item DescriptionLevel ofDifficulty

Time (minutes)

CA20-1 Pension terminology and theory. Moderate 30–35CA20-2 Pension terminology. Moderate 25–30CA20-3 Basic terminology. Simple 20–25CA20-4 Major pension concepts. Moderate 30–35CA20-5 Implications of GAAP rules on pensions. Complex 50–60CA20-6 Gains and losses, corridor amortization. Moderate 30–40CA20-7 Nonvested employees—an ethical dilemma. Moderate 20–30


SOLUTIONS TO CODIFICATION EXERCISES

CE20-1

Master Glossary

(a) The actuarial present value of benefits (whether vested or nonvested) attributed, generally by the pension benefit formula, to employee service rendered before a specified date and based on employee service and compensation (if applicable) before that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same.

(b) A plan that defines postretirement benefits in terms of monetary amounts (for example, $100,000 of life insurance) or benefit coverage to be provided (for example, up to $200 per day for hospitalization, or 80 percent of the cost of specified surgical procedures). Any postretirement benefit plan that is not a defined contribution postretirement plan is, for purposes of Subtopic 715–60, a defined benefit postretirement plan. (Specified monetary amounts and benefit coverage are collectively referred to as benefits).

(c) The value, as of a specified date, of an amount or series of amounts payable or receivable thereafter, with each amount adjusted to reflect the time value of money (through discounts for interest) and the probability of payment (for example, by means of decrements for events such as death, disability, or withdrawal) between the specified date and the expected date of payment.

(d) The cost of retroactive benefits granted in a plan amendment. Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods before the amendment.

CE20-2

According to FASB ASC 715-30-35-43 (Defined-Benefit Plans – Pension – Discount Rates):

Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost.

CE20-3

According to FASB ASC 715-30-35-4 (Defined-Benefit Plans – Pension – Components of Net Periodic Cost):

All of the following components shall be included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan:


CE 20-3 (Continued)

(a) Service cost

(b) Interest cost

(c) Actual return on plan assets, if any

(d) Amortization of any prior service cost or credit included in accumulated other comprehensive income

(e) Gain or loss (including the effects of changes in assumptions), which includes, to the extent recognized (see paragraph 715-30-35-26), amortization of the net gain or loss included in accumulated other comprehensive income

(f) Amortization of any net transition asset or obligation existing at the date of initial application of this Subtopic and remaining in accumulated other comprehensive income.

CE20-4

According to FASB ASC 715-20-50-6 (Defined-Benefit Plans – General – Interim Disclosure Requirements for Publicly Traded Entities):

A publicly traded entity shall disclose the following information for its interim financial statements that include a statement of income:

(a) The amount of net benefit cost recognized, for each period for which a statement of income is presented, showing separately each of the following:

1. The service cost component2. The interest cost component3. The expected return on plan assets for the period4. The gain or loss component5. The prior service cost or credit component6. The transition asset or obligation component7. The gain or loss recognized due to a settlement or curtailment.

(b) The total amount of the employer’s contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 715-20-50-1(g). Estimated contributions may be presented in the aggregate combining all of the following:

1. Contributions required by funding regulations or laws2. Discretionary contributions3. Noncash contributions.


ANSWERS TO QUESTIONS

**1. A private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the company’s practices.

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost.

**2. A defined-contribution plan specifies the employer’s contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employer’s profit, or compen-sation levels.

A defined-benefit plan specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits.

In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets con-tributed to the plan is borne by the employee. In a defined-benefit plan, the employer’s obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits.

**3. The employer is the organization sponsoring the pension plan. The employer incurs the costs and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements.

The pension fund or plan is the entity which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients. Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients. Accounting for the pension costs and obligations of the employer is the topic of this chapter; accounting for the pension fund is not.

**4. When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a funding agency for the purpose of meeting pension benefits when they become due. When the term “fund” is used as a verb, it means to pay over to a funding agency (as to fund future pension benefits or to fund pension cost).

**5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to meet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets). In order to determine the company’s pension obligation, the actuary must first determine the expected benefits that will be paid in the future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disable-ment and retirement, changes in compensation, and changes in discount rates to reflect the time value of money.

**6. In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries.


Questions Chapter 20 (Continued)

**7. One measure of the pension obligation is the vested benefit obligation. This measure uses only current salary levels and includes only vested benefits; that is, benefits the employee is already entitled to receive even if the employee renders no additional services under the plan.

A company’s accumulated benefit obligation is the actuarial present value of benefits attributed by the pension benefit formula to service before a specified date and is based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The projected benefit obligation is based on vested and nonvested services using future salaries.

**8. Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by the employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis.

Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees.

Frequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period. Cash-basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year. Funding is a matter of financial manage-ment, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations.

**9. The five components of pension expense are:(1) Service cost component—the actuarial present value of benefits attributed by the pension

benefit formula to employee service during the period.(2) Interest cost component—the increase in the projected benefit obligation as a result of

the passage of time.(3) Actual return on plan assets component—the reduction in pension cost for actual invest-

ment income from plan assets and the change in the market value of plan assets.(4) Amortization of prior service cost—the cost of retroactive benefits granted in a plan amend-

ment (including initiation of a plan).(5) Gains and losses—a change in the value of either the projected benefit obligation or the

plan assets resulting from experience different from that assumed or expected or from a change in an actuarial assumption.

Note to instructor: Regarding return on plan assets, the final component is expected rate of return. We are assuming above that an adjustment is made to the actual return to determine expected return.

10. The service cost component of net periodic pension expense is determined as the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. The plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period. The FASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them.

11. The interest component is the interest for the period on the projected benefit obligation outstanding during the period. The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates). Companies should look to rates of return on high-quality fixed-income investments currently available whose cash flows match the timing and amount of the expected benefit payments.



*12. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. Actuaries compute service cost at the present value of the new benefits earned by employees during the year. Prior service cost is the cost of retroactive benefits granted in a plan amendment or initiation of a pension plan. The cost of the retroactive benefits is the increase in the projected benefit obligation at the date of the amendment.

*13. When a defined-benefit plan is either initiated or amended, credit is often given to employees for years of service provided before the date of initiation or amendment. The cost of these retroactive benefits are referred to as prior service costs. Employers grant retroactive benefits because they expect to receive benefits in the future. As a result, prior service cost should not be recognized as pension expense entirely in the year of amendment or initiation. It is recognized as an adjustment to other comprehensive income. It should be recognized during the service periods of those employees who are expected to receive benefits under the plan. Consequently, prior service cost is amortized over the service life of employees who will receive benefits and is a component of net periodic pension expense each period.

*14. Liability gains and losses are unexpected gains or losses from changes in the projected benefit obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting from unexpected increases) are recognized in other comprehensive income. The accumulated gains and losses are then amortized, subject to complex amortization guidelines in other comprehensive income.

*15. If pension expense recognized in a period exceeds the current amount funded, a liability account referred to as Pension Asset /Liability arises; the account would be reported either as a current or long-term liability, depending on the ultimate date of payment.

If the current amount funded exceeds the amount recognized as pension expense, an asset account referred to as Pension Asset /Liability arises; the account would be reported as a non-current asset. Because these assets are used to fund the pension obligation, noncurrent classification is appropriate.

*16. Computation of actual return on plan assets

Fair value of plan assets at end of period................................... $10,150,000Deduct: Fair value of plan assets at beginning of period........... 9,500,000Increase in fair value of assets.................................................... 650,000Deduct: Contributions to plan during the period......................... $1,000,000Add: Benefits paid during the period..................................... 1,400,000 400,000 Actual return on plan assets........................................................ $ 1,050,000

*17. An asset gain occurs when the actual return on the plan assets is greater than the expected return on plan assets while an asset loss occurs when the actual return is less than the expected return on the plan assets. A liability gain results from unexpected decreases in the pension obligation and a liability loss results from unexpected increases in the pension obligation.

*18. Corridor amortization occurs when the accumulated OCI (G/L) balance gets too large. The gain or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits.



*19. The amount of the pension asset/liability to be reported on the company’s balance sheet is as follows:

Projected benefit obligation............................................................ $(400,000)Pension plant assets...................................................................... 350,000Pension liability.............................................................................. $ (50,000)

In the financial statements, the company will report a pension liability of $50,000. This amount is also referred to as the funded status of the plan.

*20. The prior service cost arising in the year of the amendment (which increases the projected benefit obligation) is recognized by an offsetting debit to Other Comprehensive Income (PSC). In subsequent periods, the $9,150,000 will be amortized into periodic pension expense over the remaining service lives of the employees. This approach is consistent with the treatment for actuarial gains and losses.

*21. Actuarial gains or losses arise from (1) asset gains or losses (when the expected return is different than the actual return on plan assets) and (2) a liability gain or loss (when actuarial assumptions do not coincide with actual experiences related to computation of the projected benefit obligation.) In the period that they arise, these gains and losses are not recognized as part of pension expense, but are recognized as increases or decreases in other comprehensive income. In subsequent periods, these amounts are amortized into periodic pension expense over the remaining service lives of the employees, using corridor amortization.

*22. (a) Other Comprehensive Income for 2011 is as follows:

Actuarial liability gain......................................................................... $ 10,000Asset loss.......................................................................................... 14,000Other comprehensive loss................................................................. ($ 4,000)

(b) The computation of comprehensive income for 2011 is as follows:

Net income........................................................................................ $25,000Other comprehensive loss................................................................. 4,000Comprehensive income..................................................................... $21,000

*23. Multiple plans may be combined and shown as one amount on the balance sheet, only if they are in the same under or overfunded position. For example, if the company has two or more under-funded (overfunded) plans, the underfunded (overfunded) plans are combined and shown as one amount as a liability (asset) on the balance sheet. The FASB rejected the alternative of combining all plans and representing the net amount as a single net asset or net liability. The rationale: A company does not have the ability to offset the excess of one plan against underfunded obligations of another plan. Furthermore, netting all plans is inappropriate because offsetting assets and liabili-ties is not permitted under GAAP unless a right of offset exists.

*24. (a) A contributory plan is a pension plan under which employees contribute part of the cost. In some contributory plans, employees wishing to be covered must contribute; in other contributory plans, employee contributions result in increased benefits.

(b) Vested benefits are benefits for which the employee’s right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer.

(c) Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment.

(d) The years-of-service method is used to allocate prior service cost to the remaining years of service of the affected employees. Each year receives a fraction of the original cost with the fraction depicting the number of service-years received out of the total service-years to be worked by the affected employees.



*25. The accounting issue that arises from these terminations is whether a gain should be recognized by the corporation when these assets revert (often called asset reversion transactions) to the company. The profession requires that these gains or losses be reported immediately in most situations.

26. The accounting for various forms of compensation plans under iGAAP is found in IAS 19 “Employee Benefits” and IFRS 2 “Share-Based Payment”. IAS 19 addresses the accounting for a wide range of compensation elements—wages, bonuses, postretirement benefits, and compensated absences.

27. The primary iGAAP literature has recently been amended, resulting in significant convergence between iGAAP and U.S. GAAP in this area. For example, iGAAP and U.S. GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar. For defined benefit plans, both iGAAP and U.S. GAAP recognize the net of the pension assets and liabilities on the balance sheet and both GAAPs amortize prior service costs into income over the expected service lives of employees.

Notable differences are that (1) Unlike U.S. GAAP, which recognizes prior service cost on the balance sheet (as an element of Accumulated Other Comprehensive Income), iGAAP does not recognize prior service costs on the balance sheet, (2) Under iGAAP companies have the choice of recognizing actuarial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees. U.S. GAAP does not permit choice; actuarial gains and losses (and prior service cost) are recognized in Accumulated Other Comprehensive Income and amortized to income over remaining service lives.

28. Cadbury Company will record higher income relative to the U.S. company. This is because all of the unexpected gain will be reported in income, while the U.S. company will amortize only the amount outside the corridor over the remaining service lives of the employees (10 years). In this case, the U.S. company would recognize just $1,000 ($10,000 ÷ 10). Similar effects would occur for unexpected losses.

29. The FASB and the IASB are working collaboratively on a postretirement-benefit project. As discussed in the chapter, the FASB has issued a rule addressing the recognition of benefit plans in financial statements The FASB has begun work on the second phase of the project, which will re-examine expense measurement of postretirement benefit plans. The IASB also has added a project in this area but they are on different schedule. The IASB has recently issued a discussion paper on pensions proposing: (1) elimination of smoothing via the corridor approach, (2) a different presentation of pension costs in the income statement, and (3) a new category of pensions for accounting purposes—so-called “contribution-based promises”. The IASB is monitoring the FASB’s progress and hopes to issue a converged standard in this area by 2010.

*30 Postretirement benefits other than pensions include healthcare and other welfare benefits provided to retirees, their spouses, dependents, and beneficiaries. The other welfare benefits include life insurance offered outside a pension plan, dental care as well as medical care, eye care, legal and tax services, tuition assistance, day care, and housing activities.



*31. The FASB did not cover both pensions and healthcare benefits in the earlier pension accounting rules because of the significant differences between the two types of postretirement benefits. These differences are listed in the following schedule:

Differences between Postretirement Healthcare Benefits and Pensions

Item Pensions Healthcare Benefits

Funding Generally funded. Generally NOT funded.Benefit Well-defined and level dollar amount. Generally uncapped and great

variability.Beneficiary Retiree (maybe some benefit to

surviving spouse).Retiree, spouse, and other

dependents.Benefit Payable Monthly. As needed and used.Predictability Variables are reasonably predictable. Utilization difficult to predict.

Level of cost varies geographically and fluctuates over time.

*32. The major differences between pension benefits and postretirement benefits are listed below:

Differences between Postretirement Healthcare Benefits and Pensions

Item Pensions Healthcare Benefits

Funding Generally funded. Generally NOT funded.Benefit Well-defined and level dollar amount. Generally uncapped and great

variability.Beneficiary Retiree (maybe some benefit to

surviving spouse).Retiree, spouse, and other

dependents.Benefit Payable Monthly. As needed and used.Predictability Variables are reasonably predictable. Utilization difficult to predict.

Level of cost varies geographically and fluctuates over time.

Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds under ERISA, the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits.

*33. EPBO (expected postretirement benefit obligation) is the actuary’s present value of all benefits expected to be paid after retirement, while APBO (accumulated postretirement benefit obligation) is the actuarial present value of future benefits attributed to employees’ services rendered to a particular date.

The components of postretirement expense are service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gains and losses.


SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 20-1

Service cost............................................................. $ 370,000,000Interest on PBO....................................................... 672,000,000Return on plan assets............................................ (747,000,000)Amortization of prior service cost......................... 16,000,000Amortization of net loss......................................... 25,000,000Pension expense.................................................... $ 336,000,000

BRIEF EXERCISE 20-2

Ending plan assets................................................. $2,000,000Beginning plan assets............................................ 1,780,000Increase in plan assets.......................................... 220,000Deduct: Contributions........................................... $120,000

Less: Benefits paid................................. 200,000 (80,000 )Actual return on plan assets.................................. $ 300,000

BRIEF EXERCISE 20-3

BEATY COMPANYGeneral Journal Entries Memo Record

ItemsPension Expense Cash

PensionAsset

/Liability

Projected Benefit

ObligationPlan

Assets

1/1/10 280,000 Cr. 280,000 Dr.Service cost 27,500 Dr. 27,500 Cr.Interest cost 28,000 Dr. 28,000 Cr.Actual return* 25,000 Cr. 25,000 Dr.Contributions 20,000 Cr. 20,000 Dr.Benefits 17,500 Dr. 17,500 Cr.Journal entry 30,500 Dr. 20,000 Cr. 10,500 Cr.12/31/10 10,500 Cr. 318,000 Cr. 307,500 Dr.

*Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.


BRIEF EXERCISE 20-4

Pension Expense..................................................... 32,000,000Cash.................................................................. 32,000,000

BRIEF EXERCISE 20-5

Cost per service year:$160,000/2,000 = $80

2010 amortization:350 X $80 = $28,000

BRIEF EXERCISE 20-6

Project benefit obligation......................................................... $(560,000)Plan assets at fair value........................................................... 322,000Pension liability......................................................................... $(238,000)

BRIEF EXERCISE 20-7

Net loss in accumulated OCI................................................... $465,000Corridor (10% X $3,300,000)..................................................... 330,000Excess........................................................................................ 135,000Average remaining service life................................................ ÷ 7.5 Minimum amortization.............................................................. $ 18,000

BRIEF EXERCISE 20-8

Projected benefit obligation..................................................... $2,600,000Fair value of plan assets.......................................................... 2,000,000Pension liability (classified short-term or long-term depending on when due).................................... $ 600,000

Prior service cost is reported as a component of accumulated other compre-hensive income in stockholders’ equity.


BRIEF EXERCISE 20-9

(a) Other Comprehensive Loss for 2010 is as follows:Actuarial liability loss................................................ ($28,000)Unexpected asset gain.............................................. 18,000Other comprehensive loss....................................... ($10,000)

(b) The computation of comprehensive income for 2010 is as follows:Net income................................................................. $ 26,000Other comprehensive loss....................................... (10,000)Comprehensive income............................................ $ 16,000

BRIEF EXERCISE 20-10

Pension Assets(at fair value)

Projected BenefitObligation

Pension Asset /Liability

Plan X $600,000 $500,000 $100,000 assetPlan Y $900,000 $720,000 $180,000 assetPlan Z $550,000 $700,000 $150,000 liabilityLahey reports a pension asset of $280,000 ($100,000 + $180,000) and a pension liability of $150,000.

*BRIEF EXERCISE 20-11

Service cost................................................................................. $40,000Interest cost................................................................................ 47,400Expected return on plan assets................................................ (26,900 )Postretirement expense............................................................. $60,500

*BRIEF EXERCISE 20-12

Postretirement Expense................................................ 240,900Cash........................................................................ 180,000Postretirement Asset /Liability............................. 60,900


SOLUTIONS TO EXERCISES

EXERCISE 20-1 (5–10 minutes)

(a) Computation of pension expense:Service cost...................................................... $ 60,000Interest cost ($500,000 X .10).......................... 50,000Expected return on plan assets...................... (15,000)Prior service cost amortization....................... 8,000Pension expense for 2010............................... $103,000

(b) Pension Expense...................................................... 103,000Cash................................................................... 90,000Pension Asset /Liability................................... 5,000Other Comprehensive Income (PSC).............. 8,000


Computation of pension expense:Service cost.............................................................. $ 90,000Interest cost ($700,000 X 10%)............................... 70,000Expected return on plan assets............................. (64,000)Prior service cost amortization.............................. 10,000Pension expense for 2010....................................... $106,000


EXERC

ISE 20-3 (15–25 minutes)

Copyright ©

2010 John Wiley &

Sons, Inc. K

ieso, Intermediate A

ccounting, 13/e, Solutions M

anual (For Instructor Use O

nly)20-17

BICKNER COMPANYPension Worksheet—2010

General Journal Entries Memo Record

Items

AnnualPensionExpense Cash

OCIPrior Service

CostPension

Asset/Liability

ProjectedBenefit

Obligation Plan AssetsBalance, January 1, 2010 60,000 Cr. 700,000 Cr. 640,000 Dr.Service cost 90,000 Dr. 90,000 Cr. Interest cost* 70,000 Dr. 70,000 Cr. Actual return** 64,000 Cr. 64,000 Dr.Amortization of PSC 10,000 Dr. 10,000 Cr.Contributions 105,000

Cr.105,000 Dr.

Benefits 40,000 Dr. 40,000 Cr.Journal entry for 2010*** 106,000

Dr.105,000

Cr. 10,000 Cr. 9,000 Dr.

Accumulated OCI, Dec. 31, 2009

150,000 Dr.

Balance, Dec. 31, 2010 140,000 Dr. 51,000 Cr. 820,000 Cr. 769,000 Dr.

*$70,000 = $700,000 X 10%.

**Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.

***Pension Expense................................................... 106,000***Pension Asset/Liability.......................................... 9,000

Other Comprehensive Income (PSC).......... 10,000

EXERC


20-18C

opyright © 2010 John W

iley & S

ons, Inc. Kieso, Interm

ediate Accounting, 13/e, S

olutions Manual (For Instructor U

se Only)

BOUDREAU INC.Pension Worksheet—2010


Items


PensionAsset /Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, January 1, 2010 490,000 Cr. 490,000 Dr.Service cost 40,000 Dr. 40,000 Cr.Interest cost* 39,200 Dr. 39,200 Cr.Actual return** 49,700 Cr. 49,700 Dr.Contributions 25,000 Cr. 25,000 Dr.Benefits 33,400 Dr. 33,400 Cr.Journal entry, December 31 29,500 Dr. 25,000 Cr. 4,500 Cr. Balance, December 31, 2010 4,500 Cr. 535,800 Cr. 531,300 Dr.

*$39,200 = $490,000 X .08.



Computation of Service-Years

Year Jim Paul Nancy Dave Kathy Total2010 1 1 1 1 1 52011 1 1 1 1 1 52012 1 1 1 1 1 52013 1 1 1 1 42014 1 1 1 32015 1 1 2

3 4 5 6 6 24

Cost per service-year: $72,000 ÷ 24 = $3,000

Computation of Annual Prior Service Cost Amortization

YearTotal

Service-YearsCost Per

Service-YearAnnual

Amortization2010 5 $3,000 $15,0002011 5 3,000 15,0002012 5 3,000 15,0002013 4 3,000 12,0002014 3 3,000 9,0002015 2 3,000 6,000

$72,000


Computation of Actual Return on Plan Assets

Fair value of plan assets at 12/31/10........................ $2,725,000Fair value of plan assets at 1/1/10............................ 2,400,000Increase in fair value of plan assets........................ 325,000Deduct: Contributions to plan during 2010............ $280,000

Less benefits paid during 2010................ 350,000 (70,000 )Actual return on plan assets for 2010..................... $ 395,000


EXERC


RYDELL CORP.Pension Worksheet—2010


Items


OCI–PriorService

Cost

PensionAsset/

Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, Dec. 31, 2009 0 13,800 Cr. 560,000 Cr. 546,200 Dr.Prior service cost 120,000 Dr. 120,000 Cr. Balance, Jan. 1, 2010 680,000 Cr. 546,200 Dr.Service cost 58,000 Dr. 58,000 Cr.Interest cost* 61,200 Dr. 61,200 Cr.Actual return** 52,280 Cr. 52,280 Dr.Amortization of PSC 17,000 Dr. 17,000 Cr.Contributions 65,000 Cr. 65,000 Dr.Benefits 40,000 Dr. 40,000 Cr.Journal entry for 2010 83,920 Dr. 65,000 Cr. 103,000 Dr. 121,920 Cr.Accumulated OCI, Dec. 31, 2009 0 Balance, Dec. 31, 2010 103,000 Dr. 135,720 Cr. 759,200 Cr. 623,480 Dr.

*$61,200 = $680,000 X .09.


20-20C


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se Only)


Corridor and Minimum Loss Amortization

Year

Projected Benefit

Obligation (a)Plan

Assets 10%

CorridorAccumulatedOCI (G/L) (a)

Minimum Amortization

of Loss2009 $2,000,000 $1,900,000 $200,000 $ 0 $ 02010 2,400,000 2,500,000 250,000 280,000 3,000(b)2011 2,950,000 2,600,000 295,000 367,000(c) 6,000(d)2012 3,600,000 3,000,000 360,000 372,000(e) 1,000(f)

(a) As of the beginning of the year.(b) ($280,000 – $250,000) ÷ 10 years = $3,000(c) $280,000 – $3,000 + $90,000 = $367,000(d) ($367,000 – $295,000) ÷ 12 years = $6,000(e) $367,000 – $6,000 + $11,000 = $372,000(f) ($372,000 – $360,000) ÷ 12 years = $1,000


(a) Note to financial statements disclosing components of 2010 pension expense:

Note X: Net pension expense for 2010 is composed of the following components of pension cost:

Service cost............................................................... $ 94,000Interest cost............................................................... 253,000Expected return on plan assets............................... (175,680)Prior service cost amortization................................ 42,000

Pension expense............................................... $213,320

(b) Comprehensive income, 2010

Amortization of prior service cost........................... $ (42,000)Actuarial loss............................................................. 45,680Other comprehensive loss....................................... $ 3,680

Comprehensive income, 2010Net income................................................................. $ 35,000Other comprehensive loss....................................... 3,680 Comprehensive income............................................ $ 31,320


EXERCISE 20-9 (Continued)

(c) Accumulated OCI at December 31, 2010 is $255,680; this amount is comprised of the following:

PSC Gain/LossBalance Jan. 1, 2010* $252,000 Dr. $ 0 Amortization of PSC 42,000 Cr. — Actuarial loss 45,680 Dr.Balance Dec. 31, 2010 $210,000 Dr. $45,680 Dr.

*$210,000 + $42,000


General Journal Entries Memo RecordAnnualPensionExpense Cash

OCI—PriorService

CostOCI—

Gain/Loss

PensionAsset/

Liability

ProjectedBenefit

Obligation Plan Assets

Balance, Jan. 1, 2010 335,000 Cr. 2,530,000 Cr.1 2,195,000 Dr.2

Service cost 94,000 Dr. 94,000 Cr.Interest cost 253,000 Dr. 253,000 Cr.Actual return 130,000 Cr. 130,000 Dr.Unexpected gain 45,680 Cr. 45,680 Dr.Amortization of PSC 42,000 Dr. 42,000 Cr.

Contributions 93,329 Cr. 93,329 Dr.Benefits 140,000 Dr. 140,000 Cr.Journal entry for 2010 213,320 Dr. 93,329 Cr. 42,000 Cr. 45,680 Dr. 123,671 Cr.Accumulated OCI, Dec. 31, 2009 252,000 Dr. 0 Balance, Dec. 31, 2009 210,000 Dr. 45,680 Dr. 458,671 Cr. 2,737,000 2,278,329 Dr.

1. $2,737,000 + $140,000 – $253,000 – $94,000.2. $2,278,329 + $140,000 – $93,329 – $130,000.

EXERC

ISE 20-9 (Continued)

Copyright ©

2010 John Wiley &

Sons, Inc. K




nly)20-23

EXERC


20-24C


iley & S




se Only)

(a) WEBB CORP.Pension Worksheet


Items


OCI—PriorService

CostOCI—

Gain/Loss

PensionAsset/

Liability

ProjectedBenefit


Balance, Jan. 1, 2010 120,000 Cr. 600,000 Cr. 480,000 Dr.Service cost 90,000 Dr. 90,000 Cr.Interest cost* 54,000 Dr. 54,000 Cr.Actual return 55,000 Cr. 55,000 Dr.Unexpected gain** 3,000 Dr. 3,000 Cr.Amortization of PSC 19,000 Dr. 19,000 Cr.Liability increase 76,000 Dr. 76,000 Cr.Contributions 99,000 Cr. 99,000 Dr.Benefits 85,000 Dr. 85,000 Cr.Journal entry for 2010 111,000 Dr. 99,000 Cr. 19,000 Cr. 73,000 Dr. 66,000 Cr.Accumulated OCI, Dec. 31, 2009 100,000 Dr 0 Balance, December 31, 2010 81,000 Dr. 73,000 Dr. 186,000 Cr. 735,000 Cr. 549,000 Dr.

*$54,000 = $600,000 X .09.**Expected return = $52,000.

Unexpected gain = Actual return minus expected return; $3,000 = $55,000 – $52,000.

(b) Journal EntryPension Expense.................................................................. 111,000Other Comprehensive Income (G/L)................................... 73,000

Cash......................................................................... 99,000Other Comprehensive Income (PSC)..................... 19,000Pension Asset /Liability.......................................... 66,000


(a) Pension expense for 2010 composed of the following:Service cost........................................................ $ 56,000Interest on projected benefit obligation (9% X $900,000).............................................. 81,000Expected return on plan assets...................... (54,000)Amortization of prior service cost.................... 50,000

Pension expense........................................ $133,000

(b) Pension Expense....................................................... 133,000Pension Asset /Liability............................................. 62,000

Cash..................................................................... 145,000Other Comprehensive Income (PSC)................ 50,000

(c) Income StatementPension expense................................................ $133,000

Comprehensive Income StatementNet income.................................................................. $ XXXXOther comprehensive income Amortization of PSC............................................... 50,000 Comprehensive income............................................. $ XXXX

Balance SheetLiabilitiesPension liability.................................................. $238,000*

*Projected benefit obligation $1,037,000Plan assets 799,000Pension liability $ 238,000

Partial worksheet Plan AssetsProjected Benefit

ObligationBal. January 1, 2010 $600,000 $ 900,000

Service cost 56,000Interest on PBO 81,000Actual return 54,000Contribution 145,000

Bal. December 31,2010 $799,000 $1,037,000

Stockholders’ equityAccumulated OCI (PSC) Jan. 1, 2010 400,000Amortization of prior service cost (50,000)


Accumulated OCI (PSC) Dec. 31, 2010 350,000EXERCISE 20-12 (20–30 minutes)

(a) Pension expense for 2010 composed of the following:Service cost.................................................... $ 77,000Interest on projected benefit obligation (10% X $1,500,000)..................................... 150,000Expected return on plan assets (10% X $800,000)........................................ (80,000)Amortization of prior service cost................ 120,000

Pension expense.................................... $267,000

(b) Pension Expense................................................... 267,000Pension Asset /Liability......................................... 303,000

Cash................................................................. 250,000Other Comprehensive Income (PSC)............ 120,000Other Comprehensive Income (G/L)............. 200,000 (To record pension expense and employer’s contribution)

(c) Income Statement:Pension expense............................................ $ 267,000

Comprehensive Income StatementNet income...................................................... $ XXXXOther comprehensive income (loss) Amortization of PSC................................ $120,000

Liability gain............................................. 200,000 320,000 Comprehensive income......................................... $ XXXX

Balance Sheet:Liabilities

Pension liability...................................... $ 397,000 *

Stockholders’ EquityAccumulated OCI (PSC)................................ $1,080,000**Accumulated OCI (G/L).................................. 200,000

*Projected benefit obligation, Dec. 31, 2010 $1,527,000Plan assets, Dec. 31, 2010 (1,130,000)Pension liability $ 397,000


**$1,200,000 – $120,000


EXERC


Copyright ©

2010 John Wiley &

Sons, Inc. K




nly)20-27

Note to instructor: To prove the amounts reported, a worksheet might be prepared as follows:


Items


OCI—PriorService Cost

OCI—Gain/Loss

PensionAsset/Liability

ProjectedBenefit


Balance, Jan. 1, 2010 700,000 Cr. *1,500,000 Cr. 800,000 Dr.Service cost 77,000 Dr. 77,000 Cr.Interest cost* 150,000 Dr. 150,000 Cr.Actual return** 80,000 Cr. 80,000 Dr.Amortization of PSC 120,000 Dr. 120,000 Cr.Liability gain 200,000 Cr. 200,000 Dr.Contributions 250,000 Cr. 250,000 Dr.Journal entry, for 2010 267,000 Dr. 250,000 Cr. 120,000 Cr. 200,000 Cr. 303,000 Dr.Accumulated OCI, Dec. 31, 2009 1,200,000 Dr. 0 Balance, Dec. 31, 2010 1,080,000 Dr. 200,000 Cr. 397,000 Cr. 1,527,000 Cr. 1,130,000 Dr.

*$1,500,000 X 10%.



(a) Actual Return = (Ending – Beginning) – (Contributions – Benefits)Fair value of plan assets, December 31, 2010......................................... $2,620Deduct: Fair value of plan assets, January 1, 2010............................................... 1,700Increase in fair value of plan assets................. 920Deduct: Contributions........................................ $700

Less benefits paid................................ 200 500Actual return on plan assets in 2010................ $ 420

(b) Computation of pension liability gains and losses and pension asset gains and losses.

1. Difference between 12/31/10 actuarially computed PBO and 12/31/10 recorded projected benefit obligation (PBO):PBO at end of year.............................. $3,300PBO per memo records: 1/1/10 PBO....................................... $2,500 Add interest (10%)........................... 250 Add service cost............................. 400 Less benefits paid........................... (200 ) 2,950 Liability loss.................................... $350

2. Difference between actual fair value of plan assets and expected fair value: 12/31/10 actual fair value of plan assets.............................. 2,620Expected fair value 1/1/10 fair value of plan assets...... 1,700 Add expected return ($1,700 X 10%)............................. 170 Add contributions........................... 700 Less benefits paid........................... (200 ) 2,370 Asset gain........................................ (250 )Net (gain) or loss................................. $100

(c) Because no net gain or loss existed at the beginning of the period, no amortization occurs. Therefore, the corridor calculation is not needed. An example of how the corridor would have been computed is illustrated on the next page, assuming a net loss of $240 at the beginning of the year.



Beginning-of-the-Year

Year PBOPlan

Assets (FV)10%

CorridorAccumulated

OCI (G/L)Loss

Amortization2010 $2,500 $1,700 $250 $240 -0-

(d) Pension expense for 2010:Service cost................................................................... $ 400Interest cost ($2,500 X 10%)......................................... 250Actual return on plan assets [from (a)]....................... (420)Unexpected gain [from (b) 2.]...................................... 250Pension expense........................................................... $ 480


EXERC


20-30C


iley & S




se Only)

ERICKSON COMPANYPension Worksheet—2010

General Journal Entries Memo Record Entries

ItemsAnnual Pension

Expense CashOCI—

Gain/LossPension

Asset/Liability

Projected Benefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 800 Cr. 2,500 Cr. 1,700 Dr.Service cost 400 Dr. 400 Cr.Interest cost(a) 250 Dr. 250 Cr.Actual return(b) 420 Cr. 420 Dr.Unexpected gain(c) 250 Dr. 250 Cr.Contributions 700 Cr. 700 Dr.Benefits 200 Dr. 200 Cr.Liability increase(d) 350 Dr. 350 Cr.Journal entry for 2010 480 Dr. 700 Cr. 100 Dr. 120 Dr.Accumulated OCI, Dec. 31, 2009 0 Balance, Dec. 31, 2010 100 Dr. 680 Cr. 3,300 Cr. 2,620 Dr.

(a)$2,500 X 10%(b)$420 = ($2,620 – $1,700) – ($700 – $200)(c)Actual return $420

Expected return ($1,700 X 10%) 170Asset gain $250

(d)$350 = $3,300 – ($2,500 + $400 + $250 – $200)


Journal entries 12/31/10

1. Other Comprehensive Income G/L....................... 100Pension Expense.................................................... 480Pension Asset /Liability......................................... 120

Cash................................................................. 700

Balance Sheet at December 31, 2010

LiabilitiesPension liability.............................................. $680

Stockholders’ equityAccumulated other comprehensive loss (G/L)...................................................... $100


(a) Computation of pension expense:Service cost.................................................... $ 80,000Interest cost ($700,000 X .10)........................ 70,000Expected return on plan assets.................... (10,000 )Pension expense for 2010............................. $140,000

Pension Expense................................................... 140,000Pension Asset /Liability......................................... 10,000

Cash................................................................. 150,000

(b) Income Statement:Pension expense............................................ $140,000

Balance Sheet:Liabilities

Pension liability..................................... $ 15,000 *

*$25,000 – $10,000


Annual PensionExpense Cash

Pension Asset/Liability

Projected Benefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 25,000 Cr. 700,000 Cr. 675,000 Dr.*Service cost 80,000 Dr. 80,000 Cr.Interest cost 70,000 Dr. 70,000 Cr.Actual return 10,000 Cr. 10,000 Dr.Amortization of PSCContributions 150,000 Cr. 150,000 Dr.Benefits 35,000 Dr. 35,000 Cr.**Journal entry for 2010 140,000 Dr. 150,000 Cr. 10,000 Cr.

Balance, Dec. 31, 2010 15,000 Cr. 815,000 Cr. 800,000 Dr.

*$700,000 – $25,000.**$800,000 – ($675,000 + $10,000 + $150,000) = $35,000.

EXERC


20-32C


iley & S




se Only)


The excess of the cumulative net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service period of employees. The average remaining service period is computed as follows:


Expected future years of service Number of employees


= Average remaining service life per employee


Average remaining service life per employee =


5,600400


= 14.

Amortization of Net (Gain) or Loss

(Gain) or Loss For the Year Ended December 31, Amount

2010 (300,0002011 (480,0002012 (210,000)2013 (290,000)

Year

Projected Benefit

Obligation (a)Plan

Assets (a) Corridor (b)Accumulated OCI (G/L) (a)

Minimum Amortization of (Gain) Loss

2010 $4,000,000 $2,400,000 $400,000 $ 0 $ 02011 4,520,000 2,200,000 452,000 300,000 02012 5,000,000 2,600,000 500,000 780,000 20,000(c)2013 4,240,000 3,040,000 424,000 550,000(d) 9,000(e)

(a) As of the beginning of the year.(b) The corridor is 10 percent of the greater of the projected benefit obligation or plan

assets.(c) $780,000 – $500,000 = $280,000; $280,000/14 = $20,000.(d) $780,000 – $20,000 – $210,000 = $550,000.(e) $550,000 – $424,000 = $126,000; $126,000/14 = $9,000.



(a)Year

Prior Service Cost Amortized

2010 $120,000 ($1,260,000 ÷ 10.5 years)2011 120,000 ($1,260,000 ÷ 10.5 years)

(b) The excess of the accumulated OCI (G/L) over the corridor amount is amortized by dividing the excess by the average remaining service life per employee. The average service life is 10.5 years.

Amortization of Net (Gain) or Loss

(Gain) or Loss For the Year Ended

December 31, Amount2010 ($198,0002011 (24,000)

Year

Projected Benefit

Obligation (a)Plan

Assets(a)10%

Corridor(b)AccumulatedOCI (G/L)(a)


of (Gain) Loss

2010 $2,800,000 $1,700,000 $280,000 ($ 0 $ –0–2011 3,650,000 2,900,000 365,000 198,000 –0–(c)

(a) As of the beginning of the year.(b) The corridor is 10 percent of the greater of the projected benefit obligation or

plan assets.(c) $365,000 is greater than $198,000; therefore, no amortization.

(c) Pension expense for 2010 is composed of the following:Service cost................................................................... $ 400,000Interest on projected benefit obligation ($2,800,000 X 9%)...................................................... 252,000Expected return on plan assets ($1,700,000 X 10%).................................................... (170,000)Amortization of prior service cost.............................. 120,000

Pension expense................................................... $ 602,000



Pension expense for 2011 is composed of the following:Service cost...................................................................... $475,000Interest on projected benefit obligation ($3,650,000 X 8%).......................................................... 292,000Expected return on plan assets ($2,900,000 X 10%)........................................................ (290,000)Amortization of prior service cost.................................. 120,000

Pension expense...................................................... $597,000



OCI—PriorService

CostOCI—

Gain/Loss

PensionAsset/

Liability

ProjectedBenefit


Balance, Jan. 1, 2010 1,100,000 Cr. 2,800,000 Cr. 1,700,000 Dr.Service cost 400,000 Dr. 400,000 Cr.Interest cost 252,000 Dr. 252,000 Cr.Actual return 170,000 Cr. 170,000 Dr.Amortization of PSC 120,000 Dr. 120,000 Cr.Contributions 1,030,000 Cr. 1,030,000 Dr.Actuarial loss 198,000 Dr. 198,000 Cr.Journal entry for 2010 602,000 Dr. 1,030,000 Cr. 120,000 Cr. 198,000 Dr. 350,000 Dr.

Accumulated OCI, Dec. 31, 2009 1,260,000 Dr. 0 Balance, Dec. 31, 2010 1,140,000 Dr. 198,000 Dr. 750,000 Cr. 3,650,000 Cr. 2,900,000 Dr.

Service cost 475,000 Dr. 475,000 Cr.Interest cost 292,000 Dr. 292,000 Cr.Actual return 290,000 Cr. 290,000 Dr.Actuarial gain 222,000 Cr.* 222,000 Dr.Amortization of PSC 120,000 Dr. 120,000 Cr.Contributions 600,000 Cr. 600,000 Dr.Journal entry for 2011 597,000 Dr. 600,000 Cr. 120,000 Cr. 222,000 Cr. 345,000 Dr.

Accumulated OCI, Dec. 31, 2010 1,140,000 Dr. 198,000 Dr. Balance, Dec. 31, 2011 1,020,000 Dr. 24,000 Cr. 405,000 Cr. 4,195,000 Cr. 3,790,000 Dr.

*$198,000 + $24,000.

EXERC


20-36C


iley & S




se Only)


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

General Journal Entries Memo RecordAnnual Pension Expense Cash

OCI—PriorService

CostOCI—Gain/

LossPension

Asset/Liability

Projected Benefit

ObligationPlan

Assets

Balance, Jan. 1, 2010 1,100 Cr. 2,800 Cr. 1,700 Dr.Service cost 500 Dr. 500 Cr.Interest cost 280 Dr. 280 Cr.Actual return 220 Cr. 220 Dr.Unexpected gain 150 Dr. 150 Cr.Amortization of PSC 55 Dr. 55 Cr.Contributions 800 Cr. 800 Dr.Benefits 200 Dr. 200 Cr.Liability increase 365 Dr. 365 Cr.Journal entry 765 Dr. 800 Cr. 55 Cr. 215 Dr. 125 Cr.Accumulated OCI, Dec. 31, 2009 1,100 Dr. 0 Balance, Dec. 31, 2010 1,045 Dr. 215 Dr. 1,225 Cr. 3,745 Cr. 2,520 Dr.

(b) Pension Expense.......................................... 765Other Comprehensive Income (G/L)............ 215

Pension Asset/Liability............................ 125Cash........................................................... 800Other Comprehensive Income (PSC)...... 55

(c) Usher records no amortization of gain or loss in 2010, because there were no gains or losses at the beginning of the year. For 2011, the corridor is $374.50 (10% of the PBO). Since the balance of the Other Comprehensive Income (G/L) at the beginning of 2011 ($215) is less than the corridor, there will be no gain or loss amortization in 2011 either.

*EXERCISE 20-19 (5–10 minutes)

Postretirement benefit expense is comprised of the following:

Service cost............................................................... $45,000Interest on the liability (8% X $330,000).................. 26,400Actual and expected return on plan assets............ (11,000)Postretirement Expense........................................... $60,400



General Journal Entries Memo RecordAnnual

Postretirement Expense Cash

PostretirementAsset/Liability APBO Plan Assets

Balance, Jan. 1, 2010 220,000 Cr. 330,000 Cr. 110,000 Dr.Service cost 45,000 Dr. 45,000 Cr.Interest cost 26,400 Dr. 26,400 Cr.Actual return 11,000 Cr. 11,000 Dr.Contributions 10,000 Cr. 10,000 Dr.Benefits 20,000 Dr. 20,000 Cr.Journal entry for 2010 60,400 Dr. 10,000 Cr. 50,400 Cr. Balance, Dec. 31, 2010 270,400 Cr. 381,400 Cr. 111,000 Dr.

Postretirement Expense......................................... 60,400Postretirement Asset/Liability........................ 50,400Cash.................................................................. 10,000


Service cost..................................................................... $ 83,000Interest on accumulated postretirement benefit obligation (10% X $710,000)............................ 71,000Expected return on plan assets.................................... (34,000)Amortization of prior service cost................................ 21,000Postretirement expense................................................. $141,000


Service cost............................................................................... $ 90,000Interest on accumulated postretirement benefit obligation (9% X $760,000)......................................... 68,400Expected return on plan assets.............................................. (62,000)Amortization of prior service cost.......................................... 3,000Postretirement expense........................................................... $ 99,400


See worksheet on next page.


*EXERC


Copyright ©

2010 John Wiley &

Sons, Inc. K




nly)20-39

ENGLEHART CO.Postretirement Benefit Worksheet—2010


Items

AnnualPostretirement

Expense CashOCI—Prior

Service CostPostretirementAsset/Liability APBO

PlanAssets

Balance, Jan. 1, 2010 50,000 Cr. 760,000 Cr. 710,000 Dr.Service cost 90,000 Dr. 90,000 Cr.Interest cost *68,400 Dr. 68,400 Cr.Actual return 62,000 Cr. 62,000 Dr.Contributions 56,000 Cr. 56,000 Dr.Benefits 40,000 Dr. 40,000 Cr.Amortization of PSC 3,000 Dr. 3,000 Cr.Journal entry for 2010 99,400 Dr. 56,000 Cr. 3,000 Cr. 40,400 Cr.Accumulated OCI, Dec. 31, 2009 100,000 Dr. Balance, Dec. 31, 2010 97,000 Dr. 90,400 Cr. 878,400 Cr. 788,000 Dr.

*($760,000 X 9%)


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

Annual Expense Cash

Other ComprehensiveIncome—PSC

PostretirementAsset/Liability APBO

PlanAssets

Balance, Jan. 1, 2010 290,000 Cr. 410,000 Cr. 120,000 Dr.Service cost 56,000 Dr. 56,000 Cr.Interest cost 36,900 Dr. 36,900 Cr.Actual/Expected return 2,000 Cr. 2,000 Dr.Contributions 66,000 Cr. 66,000 Dr.Benefits 5,000 Dr. 5,000 Cr.Amortization of PSC 3,000 Dr. 3,000 Cr. Journal entry for 2010 93,900 Dr. 66,000 Cr. 3,000 Cr. 24,900 Cr.Accumulated OCI, Dec. 31, 2009 30,000 Dr. Balance, Dec. 31, 2010 27,000 Dr. 314,900 Cr. 497,900 Cr. 183,000 Dr.

(b) Pension Expense................................................ 93,900Cash............................................................. 66,000Other Comprehensive Income (PSC)........ 3,000Postretirement Asset/Liability................... 24,900

(c) The discount (settlement) rate can be determined by dividing the interest cost by the beginning APBO:

$36,900 ÷ $410,000 = 9%


TIME AND PURPOSE OF PROBLEMS

Problem 20-1 (Time 40–50 minutes)Purpose—to provide a problem that requires preparation of a pension worksheet for two separate years’ pension transactions. Included in the problem are an unexpected loss and prior service cost amortization.

Problem 20-2 (Time 45–55 minutes)Purpose—to provide a problem that requires preparation of a pension worksheet for three separate years’ pension transactions, three years of general journal entries for the pension plan, and reporting in financial statements for the third year.

Problem 20-3 (Time 40–50 minutes)Purpose—to provide a problem that requires computation of the annual pension expense, preparation of the pension journal entries, measurement of gains and losses and their amortization, and presentation in financial statements.

Problem 20-4 (Time 30–40 minutes)Purpose—to provide a problem that requires computation of pension expense and preparation of the pension journal entries.

Problem 20-5 (Time 45–55 minutes)Purpose—to provide a problem that requires computation of the pension expense for three separate years and the preparation of the pension journal entries for three years.

Problem 20-6 (Time 45–60 minutes)Purpose—to provide a problem that requires computation and amortization of prior service cost, computation of pension expense, and preparation of pension journal entries.

Problem 20-7 (Time 35–45 minutes)Purpose—to provide a problem that requires preparation of a worksheet.

Problem 20-8 (Time 45–60 minutes)Purpose—to provide a problem that requires preparation of a comprehensive worksheet for two years, covering all facets of pension accounting.

Problem 20-9 (Time 40–45 minutes)Purpose—to provide a problem that requires preparation of a worksheet for two years, journal entries, and indicates financial statement presentation.

Problem 20-10 (Time 25–30 minutes)Purpose—to provide a problem to understand elements of a pension worksheet.

Problem 20-11 (Time 35–45 minutes)Purpose—to provide a problem that requires preparation of a worksheet, journal entries, and indicates financial statement presentation (year 2 of P20-10).


Time and Purpose of Problems (Continued)

Problem 20-12 (Time 35–45 minutes)Purpose—to provide a problem that requires preparation of a worksheet, journal entries, and indicates financial statement presentation.

*Problem 20-13 (Time 30–35 minutes)Purpose—to provide a problem that requires preparation of a worksheet and entries for postretirement benefit expense.

*Problem 20-14 (Time 40–45 minutes)Purpose—to provide a problem that requires a worksheet for two years, journal entries, and indicates financial statement presentation.


SOLU

TION

S TO PR

OB

LEMS

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nly)20-43

(a) CUNNINGHAM COMPANYPension Worksheet—2010 and 2011


Items

Annual Pension Expense Cash

OCI—PriorService

CostOCI—Gain/

LossPension

Asset/Liability

Projected Benefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 300,000 Cr. 4,500,000 Cr. 4,200,000 Dr.Service cost 150,000 Dr. 150,000 Cr.Interest cost* 450,000 Dr. 450,000 Cr.Actual return 252,000 Cr. 252,000 Dr.Contributions 240,000 Cr. 240,000 Dr.Benefits 200,000 Dr. 200,000 Cr.Journal entry for 2010 348,000 Dr. 240,000 Cr. 0 0 108,000 Cr.Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 408,000 Cr. 4,900,000 Cr. 4,492,000 Dr.Additional PSC, 1/1/2011 500,000 Dr. 500,000 Cr.Balance, Jan. 1, 2011 5,400,000 Cr.Service cost 180,000 Dr. 180,000 Cr.Interest cost** 540,000 Dr. 540,000 Cr.Actual return 260,000 Cr. 260,000 Dr.Unexpected loss*** 99,360 Cr. 99,360 Dr.Amortization of PSC 90,000 Dr. 90,000 Cr.Contributions 285,000 Cr. 285,000 Dr.Benefits 280,000 Dr. 280,000 Cr.Journal entry for 2011 450,640 Dr. 285,000 Cr. 410,000 Dr. 99,360 Dr. 675,000

Cr.

Accumulated OCI, Dec. 31, 2010 0 0 Balance, Dec. 31, 2011 410,000 Dr. 99,360 Dr. 1,083,000

Cr.5,840,000 Cr. 4,757,000 Dr.

*$450,000 = $4,500,000 X 10%.**$540,000 = $5,400,000 X 10%.

***$99,360 = ($4,492,000 X .08) – $260,000.

(b) Journal Entry (2011)Pension Expense.............................................................. 450,640Other Comprehensive Income (PSC).............................. 410,000Other Comprehensive Income (G/L)................................ 99,360

Cash.......................................................................... 285,000Pension Asset/Liability............................................ 675,000

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(a) JACKSON COMPANYPension Worksheet—2009, 2010, 2011


OCI—PriorService

CostOCI—

Gain/LossPension

Asset/Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2009 50,000 Cr. 250,000 Cr. 200,000 Dr.Service cost 16,000 Dr. 16,000 Cr.Interest cost(a) 25,000 Dr. 25,000 Cr.Actual return 18,000 Cr. 18,000 Dr.Unexpected loss(b) 2,000 Cr. 2,000 Dr.Contributions 16,000 Cr. 16,000 Dr.Benefits 14,000 Dr. 14,000 Cr.Journal entry for 2009 21,000 Dr. 16,000 Cr. 2,000 Dr. 7,000 Cr.Accumulated OCI, Dec. 31, 2008 0 Balance, Dec. 31, 2009 2,000 Dr. 57,000 Cr. 277,000 Cr. 220,000 Dr.

Additional PSC, 1/1/2010 160,000 Dr. 160,000 Cr.Balance, Jan. 1, 2010 437,000 Cr.Service cost 19,000 Dr. 19,000 Cr.Interest cost(c) 43,700 Dr. 43,700 Cr.Actual return(d) 22,000 Cr. 22,000 Dr.Amortization of PSC 54,400 Dr. 54,400 Cr.Contributions 40,000 Cr. 40,000 Dr.Benefits 16,400 Dr. 16,400 Cr.Journal entry for 2010 95,100 Dr. 40,000 Cr. 105,600 Dr. 0 160,700 Cr.Accumulated OCI, Dec. 31, 2009 0 2,000 Dr. Balance, Dec. 31, 2010 105,600 Dr. 2,000 Dr. 217,700 Cr. 483,300 Cr. 265,600 Dr.

Service cost 26,000 Dr. 26,000 Cr.Interest cost(e) 48,330 Dr. 48,330 Cr.Actual return 24,000 Cr. 24,000 Dr.Unexpected loss(f) 2,560 Cr. 2,560 Dr.Amortization of PSC 41,600 Dr. 41,600 Cr.Contributions 48,000 Cr. 48,000 Dr.Benefits 21,000 Dr. 21,000 Cr.Liability gain(g) 16,630 Cr. 16,630 Dr.Journal entry for 2011 89,370 Dr. 48,000 Cr. 41,600 Cr. 14,070 Cr. 14,300 Dr.Accumulated OCI, Dec. 31, 2010 105,600 Dr. 2,000 Dr. Balance, Dec. 31, 2011 64,000 Dr. 12,070 Cr. 203,400 Cr. 520,000 Cr. 316,600 Dr.

PROBLEM 20-2 (Continued)

Worksheet computations:(a)$25,000 = $250,000 X 10%(b)$2,000 = ($200,000 X 10%) – $18,000; expected return exceeds actual return.(c)$43,700 = $437,000 X 10%(d)Expected return and actual return are the same.(e)$48,330 = $483,300 X 10%(f)$2,560 = ($265,600 X 10%) – $24,000; expected return exceeds actual return.(g)$16,630 = ($483,300 + $26,000 + $48,330 – $21,000 – $520,000)(Note to instructor: Because the amount of net gain or loss does not exceed 10% of the larger of the projected benefit obligation or the fair value of the plan assets at the beginning of any of the years, no amortization is recorded.

(b) Journal entries:2009

Other Comprehensive Income (G/L)........................ 2,000Pension Expense...................................................... 21,000

Cash.................................................................... 16,000Pension Asset /Liability.................................... 7,000

2010Other Comprehensive income (PSC)...................... 105,600Pension Expense...................................................... 95,100


2011Pension Expense...................................................... 89,370Pension Asset /Liability............................................ 14,300

Other Comprehensive Income (G/L)................ 14,070Other Comprehensive Income (PSC)............... 41,600Cash.................................................................... 48,000



(c) Financial Statements—2011Income Statement

Pension expense............................................... $ 89,370

Comprehensive Income StatementNet Income......................................................... $ XXXX

Other comprehensive income (loss)Asset gain (loss)................................................ $ (2,560)Liability gain (loss)............................................ 16,630Prior service cost amortization........................ 41,600 (55,670 )

Comprehensive income............................................ $ XXXX

Balance SheetLiabilities

Pension liability.............................................. $203,400Stockholders’ equity

Accumulated other comprehensive loss (PSC)....................................................... $ 64,000Accumulated other comprehensive income (G/L)................................................... 12,070


PROBLEM 20-3

(a) Pension expense for 2010 comprises the following:

Service cost............................................................. $52,000Interest on projected benefit obligation (10% X $380,000)................................................. 38,000Actual return on plan assets.................................. (11,000)Unexpected loss..................................................... (9,000)*Amortization of gain or loss in 2010...................... 0Amortization of prior service cost......................... ($150,000 ÷ 10 years)........................................... 15,000

Pension expense............................................. $85,000

*([10% X $200,000] – $11,000)

(b) Journal Entries—2010Other Comprehensive Income (G/L)...................... 29,000Pension Expense..................................................... 85,000

Cash.................................................................. 65,000Pension Asset /Liability................................... 34,000Other Comprehensive Income (PSC)............. 15,000

*Computed in part (c)

(c) 2010 Increase/Decrease in Gains/Losses

(1) 12/31/10 new actuarially computed PBO $490,000Less: Projected benefit obligation

per memo record:1/1/10 PBO $380,000

Add interest (10% X $380,000) 38,000Add service cost (given) 52,000Less benefit payments 0

470,000Liability loss $20,000



(2) 12/31/10 fair value of plan assets $276,000Less: Expected fair value

1/1/10 fair value of plan assets $200,000

Add expected return (10% X $200,000) 20,000Add pension plan contribution 65,000Less benefit payments 0

285,000Asset loss 9,000 Net loss at 12/31/10 ($20,000 liability loss + $9,000) $29,000

The $29,000 net loss in the accumulated OCI (G/L) account becomes the beginning balance in 2011. The corridor at 1/1/11 is 10% of the greater of $490,000 (PBO) or $276,000 (market-related asset value). Since the corridor of $49,000 is greater than the balance in the accumulated OCI (G/L) account of $29,000, there will be no gain/loss amortization in 2011. It follows that no amortization occurs in 2010 because no balance existed in the accumulated OCI (G/L) account at the beginning of 2010.

(d) Financial Statements—2010

Income StatementPension expense.............................................. $ 85,000

Comprehensive Income StatementNet Income................................................................ $ XXXXOther comprehensive income (loss)

Asset gain (loss)............................................... $ (9,000)Liability gain (loss)........................................... (20,000)Prior service cost amortization....................... 15,000 (14,000 )

Comprehensive income.......................................... $ XXXXBalance Sheet

LiabilitiesPension asset /liability.......................... $214,000*

Stockholders’ equityAccumulated other comprehensive loss (PSC)........................................... $135,000**Accumulated other comprehensive loss........................... $ 29,000

*($380,000 – $200,000) + $34,000**($150,000 – $15,000)



OCI—PriorService

CostOCI—

Gain/LossPension

Asset/Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 180,000 Cr. 380,000 Cr. 200,000 Dr.Service cost 52,000 Dr. 52,000 Cr.Interest cost 38,000 Dr. 38,000 Cr.Actual return 11,000 Cr. 11,000 Dr.Unexpected loss 9,000 Cr. 9,000 Dr.Liability Loss 20,000 Dr. 20,000 Cr.Contributions 65,000 65,000 Dr.PSC Amortization 15,000 15,000 Cr.

Journal entry for 2011 85,000 65,000 15,000 Cr. 29,000 Dr. 34,000 Cr.Accumulated OCI, Dec. 31, 2009 150,000 Dr. 0 Balance, Dec. 31, 2010 135,000 Dr. 29,000 Dr. 214,000 Cr. 490,000 Cr. 276,000 Dr.

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PRO

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20-3 (Continued)

PROBLEM 20-4

(a) Computation of pension expense:

2010 2011Service cost........................................................ ($ 60,000 $ 90,000Interest cost ($700,000 X .09) and ($800,000 X .09)...................................... 63,000 72,000Expected return on plan assets........................ (24,000) (30,000)Amortization of prior service cost.................... 10,000 12,000 Pension expense............................................... ( $109,000 ( $144,000

(b) 2010Pension Asset/Liability...................................... (39,000Pension Expense............................................... 109,000

Other Comprehensive Income (PSC)......... 10,000Other Comprehensive Income (G/L).......... 23,000Cash.............................................................. (115,000

2011Pension Expense............................................... 144,000

Cash.............................................................. 120,000Pension Asset / Liability.............................. 12,000Other Comprehensive Income (PSC)......... 12,000

Note to instructors: Although not required, students could be encouraged to prepare a 2-year pension worksheet, as shown on the following page.


PRO

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20-4 (Continued)

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OCI—PriorService

CostOCI—

Gain/LossPension

Asset/Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 140,000 Cr. 700,000 Cr. 560,000 Dr.*

Service cost 60,000 Dr. 60,000 Cr.Interest cost* 63,000 Dr. 63,000 Cr.Actual return 24,000 Cr. 24,000 Dr.Unexpected lossAmortization of PSC 10,000 Dr. 10,000 Cr.Contributions 115,000 Cr. 115,000 Dr.Increase in PBO

23, 000 Cr. 23,000 Dr.**

Journal entry for 2010 109,000 Dr. 115,000 Cr. 10,000 Cr. 23,000 Cr. 39,000 Dr.Accumulated OCI, Jan. 1, 2010 250,000 Dr. 0 Balance, Dec. 31, 2010 240,000 Dr. 23,000 Cr. 101,000 Cr. 800,000 Cr. 699,000 Dr.

Service cost 90,000 Dr. 90,000 Cr.Interest cost* 72,000 Dr. 72,000 Cr.Actual return 30,000 Cr. 30,000 Dr.Unexpected gainAmortization of PSC 12,000 Dr. 12,000 Cr.Amortization of lossContributions 120,000 Cr.

120,000 Dr.

Journal entry for 2011 144,000 Dr. 120,000 Cr. 12,000 Cr. 0 12,000 Cr.Accumulated OCI, Dec. 31, 2010 240,000 Dr. 23,000 Cr. Balance, Dec. 31, 2011 228,000 Dr. 23,000 Cr. 113,000 Cr. 962,000 Cr. 849,000 Dr.

*($700,000 – $140,000)

PROBLEM 20-5

(a) Pension expense for 2010 consisted only of the service cost component amounting to $60,000. There were no prior service cost, net gain or loss, plan assets, or projected benefit obligation as of January 1, 2010.

Pension expense for 2011 comprised the following:

Service cost...................................................................... $85,000Interest on projected benefit obligation ($60,000 X 11%)............................................................. 6,600Expected return on plan assets ($50,000 X 10%)............................................................. (5,000)Amortization of net gain or loss...................................... 0Amortization of prior service cost.................................. 0

Pension expense...................................................... $86,600

Pension expense for 2012 comprised the following:

Service cost...................................................................... $119,000Interest on projected benefit obligation ($200,000 X 8%)............................................................. 16,000Expected return on plan assets ($85,000 X 10%)............................................................. (8,500)Amortization of net gain or loss (1).............................. 4,867Amortization of prior service cost.................................. 0

Pension expense...................................................... $131,367



(1)

Year

Projected Benefit

Obligation (a)Plan Assets

(a)Corridor

(b)Accumulated OCI (G/L) (a)

Minimum Amortization of (Gain) Loss

2010 $ 0 $ 0 $ 0 $( 0 $( 02011 60,000 50,000 6,000 0 02012 200,000 85,000 20,000 78,400 4,867 (c)

(a) As of the beginning of the year.(b) The corridor is 10 percent of the greater of the projected benefit obligation or

plan assets.(c) $78,400 – $20,000 = $58,400; $58,400/12 = $4,867

(b) Journal Entries—2010Pension Expense...................................................... 60,000


Journal Entries—2011Pension Expense...................................................... 86,600Other Comprehensive Income (G/L)........................ 78,400


Journal Entries—2012Pension Expense........................................................ 131,367Other Comprehensive Income (G/L)......................... 2,633*

Cash..................................................................... 105,000Pension Asset /Liability...................................... 29,000

*Note: The debit to Other Comprehensive Income (G/L) is a plug figure. It equals the corridor amortization credit ($4,867) netted against an additional loss in 2012 of $7,500.

Note to instructors: Although not required, students could be encouraged to prepare a 3-year worksheet, as presented on the following page.


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20-5 (Continued)

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OCI—Gain/Loss


ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2010Service cost 60,000 Dr. 60,000 Cr.Interest costExpected returnContributions 50,000 Cr. 50,000 Dr.Journal entry for 2010 60,000 Dr. 50,000 Cr. 10,000 Cr.Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 10,000 Cr. 60,000 Cr. 50,000 Dr.

Service cost 85,000 Dr. 85,000 Cr.Interest cost 6,600 Dr. 6,600 Cr.Actual return 5,000 Cr. 5,000 Dr.Contributions 60,000 Cr. 60,000 Dr.Increase in liability 78,400 Dr. 78,400 Cr.Benefits 30,000 Dr. 30,000 Cr.Journal entry for 2011 86,600 Dr. 60,000 Cr. 78,400 Dr. 105,000 Cr.Accumulated OCI, Dec. 31, 2010 0 Balance, Dec. 31, 2011 78,400 Dr. 115,000 Cr. 200,000 Cr. 85,000 Dr.

Service cost 119,000 Dr. 119,000 Cr.Interest cost 16,000 Dr. 16,000 Cr.Expected return 8,500 Cr. 8,500 Dr.Amortization of loss 4,867 Dr. 4,867 Cr.Contributions 105,000 Cr. 105,000 Dr.Benefits 18,500 Dr. 18,500 Cr.Liability loss* 7,500 Dr. 7,500 Cr.Journal entry for 2012 131,367 Dr. 105,000 Cr. 2,633 Dr. 29,000 Cr.Accumulated OCI, Dec. 31, 2011 78,400 Dr. Balance, Dec. 31, 2012 81,033 Dr. 144,000 Cr. 324,000 Cr. 180,000 Dr.

*$324,000 – ($200,000 + $119,000 + $16,000 – $18,500).

PROBLEM 20-6

(a) Prior Service Cost Amortization

2010 $166,667 ($2,000,000 ÷ 12 years)2011 166,667 ($2,000,000 ÷ 12 years)2012 166,667 ($2,000,000 ÷ 12 years)

(b) Pension expense for 2010 comprised the following:

Service cost......................................................................... $200,000Interest on projected benefit obligation*.......................... 500,000Actual return on plan assets**........................................... (325,000)Unexpected gain***............................................................. 25,000Amortization of prior service cost..................................... 166,667

Pension expense......................................................... $566,667

***($5,000,000 X 10% = $500,000)***[$4,100,000 – $3,000,000 – ($775,000 – $0)]***(Expected return of $300,000 – actual return of $325,000 = $25,000

unexpected gain)

(c) Pension liability, beginning of year.................................. $2,000,000Pension liability, end of year............................................. 750,000*

Decrease in liability.................................................... $1,250,000

*$4,850,000 – $4,100,000

Journal Entries—2010Pension Expense................................................... 566,667Pension Asset /Liability......................................... 1,250,000

Other Comprehensive Income (G/L)............. 875,000Other Comprehensive Income (PSC)............ 166,667Cash................................................................. 775,000



(d) 12/31/10 Fair value of plan assets $4,100,000Less: Expected fair value of assets

1/1/10 fair value of plan assets $3,000,000Add expected return (10% X $3,000,000) 300,000Add contributions to the plan 775,000Less benefits 0 4,075,000

Asset gain (25,000)

12/31/10 Actuarially computed PBO 4,850,000Less: 1/1/10 PBO $5,000,000

Add interest (10% X $5,000,000) 500,000Add service cost 200,000Less benefits 0 5,700,000Liability gain (850,000 )

Net gain 12/31/10 $ (875,000 )

Amortization in 2010: None because there was no beginning balance.Amortization in 2011 (corridor approach): $32,500, as shown below.

YearProjected Benefit

ObligationFair Value

of Plan Assets CorridorAccumulated

OCI (G/L) Amortization2010 $5,000,000 $3,000,000 $500,000 $( 0 *$ 02011 4,850,000 4,100,000 485,000 (875,000) *32,500*

*$875,000 – $485,000 = $390,000; $390,000 ÷ 12 = $32,500



OCI—PriorService

CostOCI—

Gain/LossPension

Asset/Liability

ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 2,000,000 Cr. 5,000,000 Cr. 3,000,000 Dr.Service cost 200,000 Dr. 200,000 Cr.Interest cost* 500,000 Dr. 500,000 Cr.Actual return 325,000 Cr. 325,000 Dr.Unexpected gain 25,000 Dr. 25,000 Cr.Amortization of PSC 166,667 Dr. 166,667 Cr.Contributions 775,000 Cr. 775,000 Dr.Decrease in PBO 850,000 Cr. 850,000 Dr.Journal entry for 2010 566,667 Dr. 775,000 Cr. 166,667 Cr. 875,000 Cr. 1,250,000 Dr.Accumulated OCI, Dec. 31, 2009 2,000,000 Dr. 0 Balance, Dec. 31, 2010 1,833,333 Cr. 875,000 Cr. 750,000 Cr. 4,850,000 Cr. 4,100,000 Dr.

*$5,000,000 X 10%

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PRO

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20-6 (Continued)

PRO

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20-7

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HANSON CORP.Pension Worksheet—2010


Items


OCI—Prior

Service Cost

OCI—Gain/Loss

PenisonAsset/

Liability

ProjectedBenefit

Obligation

Plan Assets

Balance, Jan. 1, 2010 180,000 Cr. 700,000 Cr.

520,000 Dr.

Service cost 108,000 Dr. 108,000 Cr.

Interest cost* 63,000 Dr. 63,000 Cr.Actual return 48,000 Cr. 48,000 Dr.Unexpected loss** 4,000 Cr. 4,000 Dr.Amortization of PSC 25,000 Dr. 25,000 Cr.Amortization of loss*** 2,100 Dr. 2,100 Cr.Contributions 133,000 Cr. 133,000 Dr.Benefits 85,000 Dr. 85,000 Cr.Journal entry for 2010 146,100 Dr.133,000 Cr. 25,000 Cr. 1,900 Dr. 10,000 Dr.Accumulated OCI, Dec. 31, 2009

81,000 Dr. 91,000 Dr.

Balance, Dec. 31, 2010 56,000 Dr. 92,900 Dr.

170,000 Cr. 786,000 Cr.

616,000 Dr.

*$63,000 = $700,000 X .09.**$4,000 = ($520,000 X .10) – $48,000.

*** 1/1 ProjectedBenefit Value of 1/1 10% Accumulated

Minimum Amortization of

PRO

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20-8

(a) LEMKE COMPANYPension Worksheet—2010 and 2011


Items

Annual Pension Expense Cash

OCI—PriorService

CostOCI—

Gain/Loss

PensionAsset/

Liability

ProjectedBenefit


Balance, Jan. 1, 2010 190,000 Cr. 600,000 Cr. 410,000 Dr.Service cost 40,000 Dr. 40,000 Cr.Interest cost(a) 60,000 Dr. 60,000 Cr.Actual return 36,000 Cr. 36,000 Dr.Unexpected loss(b) 5,000 Cr. 5,000 Dr.Amortization of PSC 70,000 Dr. 70,000 Cr.Contributions 97,000 Cr. 97,000 Dr.Benefits 31,500 Dr. 31,500 Cr.Increase in PBO 87 , 000 Dr. 87,000 Cr.Journal entry for 2010 129,000 Dr. 97,000 Cr. 70,000 Cr. 92,000 Dr. 54,000 Cr. Accumulated OCI, Dec. 31, 2009

160,000 Dr. 0

Balance, Dec. 31, 2010 90,000 Dr. 92,000 Dr. 244,000 Cr. 755,500 Cr. 511,500 Dr.Service cost 59,000 Dr. 59,000 Cr.Interest cost(c) 75,550 Dr. 75,550 Cr.Actual return 61,000 Cr. 61,000 Dr.Unexpected gain(d) 9,850 Dr. 9,850 Cr.Amortization of PSC 50,000 Dr. 50,000 Cr.Amortization of Loss(e) 823 Dr. 823 Cr.Contributions 81,000 Cr. 81,000 Dr.Benefits 54,000 Dr. 54,000 Cr.Journal entry for 2011 134,223 Dr. 81,000 Cr. 50,000 Cr. 10,673 Cr. 7,450 Dr. Accumulated OCI, Dec. 31, 2010

90,000 Dr. 92,000 Dr.

Balance, Dec. 31, 2011 40,000 Dr. 81,327 Dr. 236,550 Cr. 836,050 Cr. 599,500 Dr.

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Worksheet computations:(a)$60,000 = $600,000 X 10%.(b)$5,000 = ($410,000 X 10%) – $36,000; expected return exceeds actual return.(c)$75,550 = $755,500 X 10%.(d)$9,850 = ($511,500 X 10%) – $61,000; actual return exceeds expected return.(e)2011 Corridor Test:

Accumulated net (gain) or loss at beginning of year.................. $92,00010% of larger of PBO or fair value of plan assets....................... 75,550Amortizable amount....................................................................... $16,450

2011 amortization ($16,450 ÷ 20 years)........................................ $ 823

(b) 2010Pension Expense........................................................ 129,000Other Comprehensive Income (G/L)......................... 92,000

Cash..................................................................... 97,000Pension Asset /Liability...................................... 54,000Other Comprehensive Income (PSC)................ 70,000

2011Pension Asset /Liability............................................. 7,450Pension Expense........................................................ 134,223

Cash..................................................................... 81,000Other Comprehensive Income (PSC)................ 50,000Other Comprehensive Income (G/L)................. 10,673



(c) Financial Statements—2011

Income StatementPension expense............................................. $134,223

Comprehensive Income Statement

Net Income............................................................... $ XXXXOther comprehensive income (loss)

Asset gain (loss).............................................. $9,850Amortization of loss........................................ 823Prior Service cost amortization..................... 50,000 60,673

Comprehensive income $ XXXXBalance Sheet

LiabilitiesPension liability........................................ $236,550

Stockholders’ equityAccumulated other comprehensive loss (PSC)............................................. $ 40,000Accumulated other comprehensive loss (G/L)................................................. 81,327


PROBLEM 20-9

(a) See worksheet on next page.

(b) December 31, 2010

Other Comprehensive Income (G/L)...................... 24,000Pension Expense..................................................... 334,000

Cash.................................................................. 200,000Pension Asset /Liability................................... 158,000

(c) See worksheet on next page. The entry is below.

December 31, 2011

Other Comprehensive Income (PSC)..................... 510,000Other Comprehensive Income (G/L)...................... 36,560Pension Expense..................................................... 432,440

Cash.................................................................. 184,658Pension Asset/Liability.................................... 794,342

(d) Financial Statements—2011

Income StatementPension expense.............................................. $432,440


Pension liability......................................... $952,342Stockholders’ equity

Accumulated other comprehensive loss (PSC)................................................ $510,000Accumulated other comprehensive loss (G/L)................................................. 60,560


PRO

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20-9 (Continued)

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(a) HOBBS COMPANYPension Worksheet—2010 and 2011


Items

AnnualPension Expense Cash

OCI—PriorService Cost

OCI—Gain/Loss


ProjectedBenefit

ObligationPlan

AssetsBalance, Jan. 1, 2010 4,600,000 Cr. 4,600,000 Dr.Service cost 150,000 Dr. 150,000 Cr.Interest cost(a) 460,000 Dr. 460,000 Cr.Actual return 252,000 Cr. 252,000 Dr.Unexpected loss(b) 24,000 Cr. 24,000 Dr.Contributions 200,000 Cr. 200,000 Dr.Benefits 220,000 Dr. 220,000 Cr.Journal entry for 2010 334,000 Dr. 200,000 Cr. 24,000 Dr. 158,000 Cr.Accumulated OCI Dec. 31, 2009 0 Balance, Dec. 31, 2010 24,000 Dr. 158,000 Cr. 4,990,000 Cr. 4,832,000 Dr.Additional PSC, 1/1/2011 600,000 Dr. 600,000 Cr.Balance, Jan. 1, 2011 5,590,000 Cr.Service cost 170,000 Dr. 170,000 Cr.Interest cost(c) 559,000 Dr. 559,000 Cr.Actual return 350,000 Cr. 350,000 Dr.Unexpected loss(d) 36,560 Cr. 36,560 Dr.Amortization of PSC 90,000 Dr. 90,000 Cr.Contributions 184,658 Cr. 184,658 Dr.Benefits 280,000 Dr. 280,000 Cr.Journal entry for 2011 432,440 Dr. 184,658 Cr. 510,000 Dr. 36,560 Dr. 794,342 Cr. Accumulated OCI, Dec. 31, 2010 0 24,000 Dr. Balance, Dec. 31, 2011 510,000 Dr. 60,560 Dr. 952,342 Cr. 6,039,000 Cr. 5,086,658 Dr.(a)$460,000 = $4,600,000 X 10%.(b)$24,000 = ($4,600,000 X 6%) – $252,000.(c)$559,000 = ($4,990,000 + $600,000) X 10%.(d)$36,560 = ($4,832,000 X .08) – $350,000.

(a) Completed Worksheet—2010 KRAMER COMPANY General Journal Entries Memo Record


OCI—Prior

Service Cost

OCI—Gain/Loss

PensionAsset/

Liability

ProjectedBenefit

Obligation

Plan Assets

Balance, Jan. 1, 2010 120,000 Cr. 325,000 Cr.

205,000 Dr.

Service cost 20,000 Dr. 20,000 Cr.Interest cost 26,000 Dr. 26,000 Cr.Actual return 18,000 Cr. 18,000 Dr.Unexpected loss 2,500 Cr. 2,500 Dr.Amortization of PSC 35,000 Dr. 35,000

Cr.Contributions 41,000 Cr. 41,000 Dr.Benefits 15,000 Dr. 15,000 Cr.Increase in PBO 43,500 Dr. 43,500 Cr.Journal entry for 2010 60,500 Dr. 41,000 Cr. 35,000

Cr.46,000 Dr. 30,500 Cr.


80,000 Dr.

0

Balance, Dec. 31, 2010 45,000 Dr.

46,000 Dr. 150,500 Cr. 399,500 Cr.

249,000 Dr.

(b) 2010Pension Expense................................................................................. 60,500Other Comprehensive Income (G/L).................................................. 46,000

Cash.......................................................................................... 41,000

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(a) Completed Worksheet—2011 KRAMER COMPANY General Journal Entries Memo Record


OCI—Prior

Service Cost

OCI—Gain/Loss

PenisonAsset/

Liability

ProjectedBenefit

Obligation

Plan Assets

Balance, Jan. 1, 2011 150,500 Cr. 399,500 Cr.

249,000 Dr.

Service cost 59,000 Dr. 59,000 Cr.Interest cost 39,950 Dr. 39,950 Cr.Actual return 32,000 Cr. 32,000 Dr.Unexpected gain 7,100 Dr. 7,100 Cr.Amortization of PSC 28,000 Dr. 28,000 Cr.Amortization of loss 242 Dr. 242 Cr.Contributions 51,000 Cr. 51,000 Dr.Benefits 27,000 Dr. 27,000 Cr.Journal entry for 2011 102,292 Dr. 51,000 Cr. 28,000

Cr.7,342 Cr. 15,950 Cr.

Accumulated OCI, Dec. 31, 45,000 46,000 Dr.

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Worksheet computations:

Interest cost: $39,950 = $399,500 X 10%Unexpected gain: $7,100 = ($249,000 X 10%) – $32,000; actual return exceeds expected return.

2011 Corridor Test:Accumulated net (gain) or loss at beginning of year.... $46,00010% of larger of PBO or fair value of plan assets...... 39,950 Amortizable amount..................................................... $ 6,050

2011 amortization ($6,050 ÷ 25 years)......................... $ 242

(b) 2011Pension Expense.......................................................... 102,292

Pension Asset/Liability......................................... 15,950Other Comprehensive Income (PSC).................. 28,000Other Comprehensive Income (G/L)................... 7,342Cash....................................................................... 51,000


Pension expense................................................... $102,292

Comprehensive Income StatementNet Income.................................................................... $ XXXXOther comprehensive income (loss)

Asset gain (loss)................................................... 7,100Amortization of loss.............................................. 242Prior service cost amortization............................ 28,000 35,342

Comprehensive income................................................ $ XXXX


Pension liability........................................................ $166,450Stockholders’ equity

Accumulated other comprehensive loss (PSC).. . . $ 17,000Accumulated other comprehensive loss (G/L)...... 38,658


(a) LARSON CORP.Pension Worksheet—2011


OCI—Prior

Service Cost

OCI—Gain/Loss

PenisonAsset/

Liability

ProjectedBenefit

Obligation

Plan Assets

Balance, Jan. 1, 2011 70,000 Cr. 340,000 Cr.

270,000 Dr.

Service cost 45,000 Dr. 45,000 Cr.Interest cost* 23,800 Dr. 23,800 Cr.Actual return 27,000 Cr. 27,000 Dr.Unexpected gain** 5,400 Dr. 5,400 Cr.Amortization of PSC 12,000 Dr. 12,000

Cr.Amortization of loss*** 500 Dr. 500 Cr.Contributions 65,000 Cr. 65,000 Dr.Benefits 41,000 Dr. 41,000 Cr.Journal entry for 2011 59,700 Dr. 65,000 Cr. 12,000

Cr. 5,900 Cr. 23,200 Dr.


90,000 Dr.

39,000 Dr.

Balance, Dec. 31, 2011 78,000 Dr.

33,100 Dr. 46,800 Cr. 367,800 Cr.

321,000 Dr.

*$23,800 = $340,000 X .07.**$5,400 = ($270,000 X .08) – $27,000.

*** 1/1 ProjectedBenefit Value of 1/1 10% Accumulated

Minimum Amortization of

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(b) 2011Pension Expense....................................................... 59,700Pension Asset/Liability............................................. 23,200

Other Comprehensive Income (PSC)............... 12,000Other Comprehensive Income (G/L)................. 5,900Cash.................................................................... 65,000


Pension expense................................................ $59,700

Comprehensive Income StatementNet Income................................................................. $ XXXXOther comprehensive income (loss)

Asset gain (loss)................................................ 5,400Amortization of loss........................................... 500Prior Service cost amortization........................ 12,000 17,900

Comprehensive income............................................ $ XXXX


Pension liability....................................................... $46,800

Stockholders’ equityAccumulated other comprehensive loss (PSC).... $78,000Accumulated other comprehensive loss (G/L)..... 33,100


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(a) HOLLENBECK FOODS INC.Postretirement Benefit Worksheet—2010


Items

AnnualPostretirement

Expense CashOCI—Gain/

LossPostretirementAsset/Liability APBO Plan Assets

Balance, Jan. 1, 2010 200,000 Cr. 200,000 Dr.Service cost 70,000 Dr. 70,000 Cr.Interest cost* 20,000 Dr. 20,000 Cr. Actual return 15,000 Cr. 15,000 Dr.Unexpected gain** 5,000 Dr. 5,000 Cr.Contributions 65,000 Cr. 65,000 Dr.Benefits 44,000 Dr. 44,000 Cr.Journal entry, for 2010 80,000 Dr. 65,000 Cr. 5,000 Cr. 10,000 Cr.Accumulated OCI, Dec. 31, 2009 0 Balance, Dec. 31, 2010 5,000 Cr. 10,000 Cr. 246,000 Cr. 236,000 Dr.

*$200,000 X .10 = $20,000**$15,000 – $10,000 = $5,000

(b) Journal EntryPostretirement Expense................................................... 80,000

Other Comprehensive Income (G/L)........................ 5,000Postretirement Asset/Liability.................................. 10,000Cash............................................................................ 65,000

Financial StatementsIncome Statement

Postretirement expense.................................................... $80,000Comprehensive IncomeNet income.............................................................................. $XXXX

Asset gain (loss)................................................................ 5,000 Comprehensive income........................................................ $XXXXBalance Sheet

LiabilitiesPostretirement asset/liability.................................... $10,000

Stockholders’ EquityAccumulated other comprehensive income........... $ 5,000

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*PROBLEM 20-14

(a) See worksheet on next page.

(b) December 31, 2010Postretirement Expense....................................... 120,000Other Comprehensive Income (G/L)................... 40,000

Cash................................................................ 45,000Postretirement Asset/Liability...................... 115,000

(c) See worksheet on next page. The entry is below.

December 31, 2011Other Comprehensive Income (PSC).................. 163,000Other Comprehensive Income (G/L)................... 23,700Postretirement Expense....................................... 221,800

Cash................................................................ 35,000Postretirement Asset/Liability...................... 373,500

(d) Financial Statements—2011Income Statement

Postretirement expense................................ $221,800

Comprehensive Income StatementNet Income............................................................ $ XXXXOther comprehensive income (loss)

Asset gain (loss)........................................... $ (23,700)Plan amendment (PSC)................................ (175,000)Prior service cost amortization.................... 12,000 (186,700 )

Comprehensive income....................................... $ XXXX


Postretirement liability............................................ $488,500Stockholders’ equity

Accumulated other comprehensive loss (PSC).... $163,000Accumulated other comprehensive loss (G/L)..... 63,700


General Journal Entries Memo RecordAnnual

Expense CashOCI—Prior

Service CostOCI—

Gain/LossPostretirementAsset/Liability APBO

Plan Assets

Balance, Jan. 1, 2010 0 2,250,000 Cr. 2,250,000 Dr.Service cost 75,000 Dr. 75,000 Cr.Interest costa 225,000 Dr. 225,000 Cr.Actual return 140,000 Cr. 140,000 Dr.Unexpected lossb 40,000 Cr. 40,000 Dr.Contributions 45,000 Cr. 45,000 Dr.Benefits 40,000 Dr. 40,000 Cr.Journal entry for 2010 120,000 Dr. 45,000 Cr. 0 40,000 Dr. 115,000 Cr.Accumulated OCI, Dec. 31, 2009 0 0 Balance, Dec. 31, 2010 40,000 Dr. 115,000 Cr. 2,510,000 Cr. 2,395,000 Dr.Additional PSC, 1/1/2011 175,000 Dr. 175,000 Cr.Balance, Jan. 1, 2011 2,685,000 Cr.Service cost 85,000 Dr. 85,000 Cr.Interest costc 268,500 Dr. 268,500 Cr.Actual return 120,000 Cr. 120,000 Dr.Unexpected lossd 23,700 Cr. 23,700 Dr.Amortization of PSC 12,000 Dr. 12,000 Cr.Contributions 35,000 Cr. 35,000 Dr.Benefits 45,000 Dr. 45,000 Cr.Journal entry for 2011 221,800 Dr. 35,000 Cr. 163,000 Dr. 23,700 Dr. 373,500 Cr. Accumulated OCI, Dec. 31, 2010 0 40,000 Dr. Balance, Dec. 31, 2011 163,000 Dr. 63,700 Dr. 488,500 Cr. 2,993,500 Cr. 2,505,000 Dr.

a$2,250,000 X 10%b($2,250,000 X 8%) – $140,000.c$2,685,000 X 10%d($2,395,000 X 6%) – $120,000.

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TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS

CA 20-1 (Time 30–35 minutes)Purpose—to provide the student with the opportunity to discuss some of the more traditional issues related to pension reporting. Specifically, the student is asked to define a pension plan, distinguish between a funded and unfunded plan, differentiate between accounting for the employer and the pension fund. In addition, justification for accrual accounting must be developed, as well as a determination of the relative objectivity of the accrual versus the cash basis.

CA 20-2 (Time 25–30 minutes)Purpose—to provide the student with the opportunity to discuss the terminology employed in GAAP related to pension accounting.

CA 20-3 (Time 20–25 minutes)Purpose—to provide the student with the opportunity to discuss the reasons why accrual accounting is followed for pension reporting. In addition, certain terms are required to be explained and the proper footnote disclosures identified.

CA 20-4 (Time 30–35 minutes)Purpose—to provide the student with the opportunity to study some of the implications of GAAP as it related to pensions. The student is required to identify the five components of pension expense, the major differences between the accumulated benefit obligation and the projected benefit obligation, and how to report actuarial gains and losses.

CA 20-5 (Time 50–60 minutes)Purpose—to provide the student with the opportunity to discuss the implications of GAAP given a number of different factual situations related to pensions. This case is quite thought-provoking and should stimulate a great deal of class discussion.

CA 20-6 (Time 30–40 minutes)Purpose—to provide the student with the opportunity to explain gains and losses, including the use of corridor amortization.

CA 20-7 (Time 20–30 minutes)Purpose—to provide the student with the opportunity to consider the ethical implications of the impact of pension benefits and their impact on financial statements.


SOLUTIONS TO CONCEPTS FOR ANALYSIS

CA 20-1

(a) A private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the company’s practices.

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost.

(b) The employer is the organization sponsoring the pension plan. The employer incurs the costs and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements.

The pension fund or plan is the entity which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients. Accounting for the fund involves identifying receipts as contributions from the employer sponsor and as income from fund investments and computing the amounts due to individual pension recipients.

(c) 1. Relative to the pension fund the term “funded” refers to the relationship between pension fund assets and the present value of expected future pension benefit payments; thus, the pension fund may be fully funded or underfunded. Relative to the employer, the term “funded” refers to the relationship of the contributions made by the employer to the pension fund and the pension expense accrued by the employer; if the employer contributes annually to the pension fund an amount equal to the pension expense, the employer is fully funded.

2. Relative to the pension fund, the pension liability is an actuarial concept representing an economic liability under the pension plan for future cash payments to retirees. From the viewpoint of the employer, the pension liability is an accounting credit that results from an excess of amounts expensed over amounts contributed (funded) to the pension fund.

(d) 1. The theoretical justification for accrual recognition of pension costs is based on the matching concept. Pension costs are incurred during the period over which an employee renders services to the enterprise; these costs may be paid upon the employee’s retirement, over a period of time after retirement, as incurred through funding or insurance plans, or through some combination of any or all of these methods.

2. Although cash (pay-as-you-go) accounting is highly objective for the final determination of actual pension costs, it provides no measurement of annual pension costs as they are incurred. Accrual accounting provides greater objectivity in the annual measurement of pension costs than does cash accounting if actuarial funding methods are applied to actuarial valuations to determine the provision for pension costs. While cash accounting provides a more precise determination of the final cost, accrual accounting provides a more objective measure of the annual cost.


CA 20-1 (Continued)

(e) Terms and their definitions as they apply to accounting for pension plans follow:

1. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to employee service during that period. The service cost component is a portion of the projected benefit obligation and is unaffected by the funded status of the plan.

2. Prior service costs are the retroactive benefits granted in a plan amendment (or initiation). Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment.

3. Vested benefits are benefits that are not contingent on the employee continuing in the service of the employer. In some plans the payment of the benefits will begin only when the employee reaches the normal retirement date; in other plans the payment of the benefits will begin when the employee retires (which may be before or after the normal retirement date). The actuarially computed value of vested benefits represents the present value: (a) the benefits expected to become payable to former employees who have retired, or who have terminated service with vested rights, at the date of determination; and (b) the benefits (based on service rendered prior to the date of determination) expected to become payable at future dates to present employees, taking into account the probable time that employees will retire.

CA 20-2

1. Pension asset/liability in the asset section is the excess of the fair value of pension plan assets over the projected benefit obligation.

2. Pension asset/liability in the liability section is the excess of the projected benefit obligation over the fair value of the pension plan assets.

3. Accumulated OCI—PSC arises when an additional liability is recognized in the PBO due to prior service cost. This account should be reported in the stockholders’ equity section as a component of accumulated other comprehensive income. In addition, it should be shown as part of other comprehensive income.

4. Pension expense is the amount recognized in an employer’s financial statements as the expense for a pension plan for the period. Components of pension expense are service cost, interest cost, expected return on plan assets, amortization of gain or loss, and amortization of prior service cost. It should be noted that GAAP uses the term net periodic pension cost instead of pension expense because part of the cost recognized in a period may be capitalized along with other costs as part of an asset such as inventory.


CA 20-3

(a) 1. The theoretical justification for accrual recognition of pension costs is based on the matching concept. Pension costs are incurred during the period over which an employee renders services to the enterprise; these costs may be paid upon the employee’s retirement, over a period of time after retirement, as incurred through funding or insurance plans, or through some combination of any or all of these methods.

2. Although cash (pay-as-you-go) accounting is highly objective for the final determination of actual pension costs, it provides no measurement of annual pension costs as they are incurred. Accrual accounting provides greater objectivity in the annual measurement of pension costs than does cash accounting.

(b) Terms and their definitions as they apply to accounting for pensions follow:

1. Market-related asset value, when based on a calculated value, is a moving average of pension plan asset values over a period of time. Considerable flexibility is permitted in computing this amount. In many cases, companies will undoubtedly use the actuarial asset value employed by the actuary as their market-related asset value for purposes of applying this concept to pension reporting.

2. The projected benefit obligation is the present value of vested and nonvested employee benefits accrued to date based on employees’ future salary levels. This is the pension liability required by GAAP.

3. The corridor approach was developed by the FASB as the method for determining when to amortize the balance in the Accumulated OCI (G/L) account. The net gain or loss balance is amortized when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning-of-the-year balances of the projected benefit obligation or the market-related value of the plan assets.

(c) The following disclosures about a company’s pension plans should be made in financial statements or their notes:

1. A description of the plan including employee groups covered, type of benefit formula, funding policy, types of assets held, and the nature and effect of significant matters affecting comparability of information for all periods presented.

2. The components of net periodic pension expense for the period.

3. A reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period.

4. Pension-related amounts recorded In Accumulated OCI and the impact of amortization of these items on pension expense in the current and next year.

5. A table is required indicating the allocation of pension plan assets by category (equity securities, debt securities, real estate, and other assets), and showing the percentage of the fair value to total plan assets. In addition, a narrative description of investment policies and strategies, including the target allocation percentages (if used by the company), must be disclosed.

6. The company must disclose the expected benefit payments to be paid to current plan participants for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter, based on the same assumptions used to measure the company’s benefit obligation at the end of the year. Also required is disclosure of a company’s best estimate of expected contributions to be paid to the plan during the next year.


CA 20-4

(a) Pension benefits are part of the compensation received by employees for their services. The actual payment of these benefits is deferred until after retirement. The net periodic pension expense measures this compensation and consists of the following five elements:

1. The service cost component is the present value of the benefits earned by the employees during the current period.

2. Since a pension represents a deferred compensation agreement, a liability is created when the plan is adopted. The interest cost component is the increase in that liability, the projected benefit obligation, due to the passage of time.

3. In order to discharge the pension liability, an employer contributes to a pension fund. The return on the fund assets serves to reduce the interest element of the pension expense. Specifically, the expected return reduces pension expense. Expected return is the expected rate of return times the market-related value of plan assets.

4. When a pension plan is adopted or amended, credit is often given for employee service rendered in prior years. This retroactive credit, or prior service cost, is charged to other comprehensive income (PSC) in the year the plan is adopted or amended, and then is recognized as pension expense over the time that the employees who benefited from this credit worked.

5. The gains and losses component arises from a change in the amount of either the projected benefit obligation or the plan assets. This component is amortized via corridor amortization.

(b) The major similarity between the accumulated benefit obligation and the projected benefit obligation is that they both represent the present value of the benefit attributed by the pension benefit formula to employee service rendered prior to a specific date. All things being equal, when an employee is about to retire, the accumulated benefit obligation and the projected benefit obligation would be the same.

The major difference between the accumulated benefit obligation and the projected benefit obligation is that the former is based on present salary levels and the latter is based on estimated future salary levels. Assuming salary increases over time, the projected benefit obligation should be higher than the accumulated benefit obligation.

(c) 1. Pension gains and losses, sometimes called actuarial gains and losses, result from changes in the value of the projected benefit obligation or the fair value of the plan assets. These changes arise from the deviations between the estimated conditions and the actual experience, and from changes in assumptions. The volatility of these gains and losses may reflect an unavoidable inability to predict compensation levels, length of employee service, mortality, retirement ages, and other relevant events accurately for a period, or several periods. Therefore, fully recognizing the gains or losses on the income statement may result in volatility that does not reflect actual changes in the funded status of the plan in that period.

2. In order to decrease the volatility of the reporting of the pension gains or losses, the FASB had adopted what is referred to as the “corridor approach.” This approach achieves the objective by amortization of the accumulated OCI (G/L) in excess of 10% of the greater of the projected benefit obligation or the market-related asset value of the plan assets.


CA 20-51. This situation can exist because companies vary as to whether they are using an implicit or

explicit set of assumptions when interest rates are disclosed. In the implicit approach, two or more assumptions do not individually represent the best estimate of the plan’s future experience with respect to these assumptions, but the aggregate effect of their combined use is presumed to be approximately the same as that of an explicit approach. In the explicit approach, each significant assumption reflecting the best estimate of the plan’s future experience solely with respect to that assumption must be stated. As a result, some companies are presently using an implicit approach, others an explicit approach. GAAP requires yet more consistency in discount rates. It requires companies to use rates on high quality fixed income investments currently available whose cash flows match the timing and amount of the expected benefit payments. As a result, this large variance in interest rates will probably disappear to some extent. However, it should be noted that companies will have some leeway in establishing settlement rates. In addition, the expected return on assets will also be different among companies.

2. This situation will occur because the net funded position of the plan is required to be reported. That is, companies are required to report as a liability the excess of their projected benefit obligation over the fair value of plan assets. In the past, the basic liability companies reported was the excess of the amount expensed over the amount funded.

3. This statement is questionable. If a financial measure purports to represent a phenomenon that is volatile, the measure must show that volatility or it will not be representationally faithful. Never-the-less, many argue that volatility is inappropriate when dealing with such long-term measures as pensions. A good example of where dampening might be useful is the recognition of gains and losses. If assumptions prove to be accurate estimates of experience over a number of years, gains or losses in one year will be offset by losses or gains in subsequent periods, and amortization of gains and losses would be unnecessary. The main point is that volatility per se should not be considered undesirable when establishing accounting principles. Although some managements may consider volatility bad, this belief should not influence standard-setting. However, it is clear from some of the compromises made in GAAP that certain procedures were provided to dampen the volatility effect.

4. (a) In a defined-contribution plan, the amount contributed is the amount expensed. No significant reporting problems exist here. On the other hand, defined benefit plans involve many difficult reporting issues which may lead to additional expense and liability recognition.

Significant amendments will generally increase prior service cost which may lead to significant adjustments to pension expense in the future.

(b) Plan participants are of importance, because the expected future years of service com-putation can have an impact on the amortization of the prior service cost and gains and losses.

(c) If the plan is underfunded, pension expense will generally increase (all other factors constant). If the plan is overfunded, pension expense will generally decrease (all other factors constant). The reason is that the expected return on plan assets will be less if the plan is underfunded and vice versa.

(d) If the company is using an actuarial funding method different than the one prescribed in GAAP (benefits/years-of-service approach), some changes in the computation of pension expense will occur for the company.

5. The corridor method is an approach which requires that only gains and losses in excess of 10% of the greater of the projected benefit obligation or market related plan asset value be allocated. This excess is then amortized over the average remaining service period of current employees expected to participate in the plan.

The corridor’s purpose is to only recognize gains and losses above a certain amount, on the theory that gains and losses within the corridor will offset one another over time.


CA 20-6

To: Vickie Plato, Accounting Clerk

From: Good Student, Manager of Accounting

Date: January 3, 2013

Subject: Amortization of gains and losses in pension expense

Pension expense includes several components; one occasionally included is the amortization of cumulative gains/losses. These gains/losses occur for two reasons. First, the plan assets may provide a return that is either greater or less than what was expected. Second, changes in actuarial assumptions may create increases or decreases in the pension liability. If these gains/losses are small in relation to the projected benefit obligation (PBO) or the market related value of the Plan Assets (PA), then do not include them in annual pension expense.

If, in any given year, the gains or losses become too great, then at least a portion must be included in pension expense so as not to understate or overstate the annual obligation. This is done through a process called amortization.

To decide whether or not you should include gains/losses in annual pension expense, calculate 10 percent of either the PBO or the PA (whichever is greater) as a “corridor.” Amortize the amount of any gain or loss falling outside the corridor over the average remaining service life of the active employees. Note: these gains/losses must exist at the beginning of the year for which amortization takes place [see (a) on the schedule below].

Thus, in the attached schedule, no amortization of the $280,000 loss in 2009 was required because the balance in the gain/loss account at the beginning of that year was zero. However, at the beginning of 2010, the balance in that account was $280,000. The 10 percent corridor is $250,000, so the loss exceeds this corridor by $30,000. Since the remaining service life of employees is 10 years, you derive the amortized portion by dividing $30,000 by 10: $3,000 [see (b) on the schedule below].

Note that the unamortized portion of the gain/loss from the previous year is combined with the current gain/loss. Check this new sum against a newly calculated 10 percent corridor. If the sum exceeds this corridor, then amortize the excess.

In the attached schedule, the unamortized loss from 2010 ($277,000) was added to the 2010 loss of $85,000, resulting in a cumulative loss of $362,000 (see (c) below). This amount exceeds the new corridor ($290,000) by $72,000. However, the remaining service life has been changed to 12 years, resulting in annual amortization of only $6,000 [see (d) below].

Finally, if the losses from 2011 are added to the unamortized portion of the loss from prior years, the sum ($368,000) falls within the 2012 corridor ($390,000) and does not need to be amortized at all.

Corridor and Minimum Loss Amortization Schedule

YearProjected Benefit

Obligation (a)Plan Assets

Value (a) 10% CorridorAccumulatedOCI (G/L) (a)


of Loss2009 $2,200,000 $1,900,000 $220,000 $ 0 $ 02010 2,400,000 2,500,000 250,000 280,000 3,000 (b)2011 2,900,000 2,600,000 290,000 362,000 (c) 6,000 (d)2012 3,900,000 3,000,000 390,000 368,000 (e) 0


CA 20-6 (Continued)

(a) As of the beginning of the year.(b) ($280,000 – $250,000) ÷ 10 years = $3,000(c) $280,000 – $3,000 + $85,000 = $362,000(d) ($362,000 – $290,000) ÷ 12 years = $6,000(e) $362,000 – $6,000 + $12,000 = $368,000

CA 20-7

While Habbe may be correct in assuming that the termination of nonvested employees would decrease its pension-related liabilities and associated expenses, she is callous to suggest that firing employees is a reasonable approach to correcting the underfunding of College Electronix’s pension plan. Arbitrarily dismissing productive employees on the basis of being vested or not vested in the pension plan in order to avoid capitalizing a liability and recognizing expenses is a capricious and unsound business decision.

Gerald Ott should discuss the ethical, legal, and financial implications of the alternatives available as well as the accounting requirements relating to this situation. This obligation and its effect on the financial statements should have been known to Thinken Technology when it performed its due diligence audit of CE at the time of merger negotiations. Thinken Technology should capitalize the pension obligations of CE as required by GAAP.


FINANCIAL REPORTING PROBLEM

(a) P&G offers various postretirement benefits to its employees. The most prevalent employee benefit plans offered are defined contribution plans, which cover substantially all employees in the U.S. Under the defined contribution plans, the company generally makes contributions to par-ticipants based on individual base salaries and years of service.

The company maintains the Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. defined contribution plan, as well as other retiree benefits.

Certain other employees, primarily outside the U.S., are covered by local defined benefit plans.

(b) 2007 Pension expense $183,000,0002006 Pension expense $374,000,0002005 Pension expense $268,000,000

(c) In 2007, P&G reports a $2,898,000,000 Accrued Pension Cost on its balance sheet. It reports $183,000,000 as pension expense on its income statement. It also reports a postretirement liability of $503,000,000. (See Note 4).

(d) P&G provides the following disclosure of its asset allocations for the pension fund and the fund for Other Retiree Benefits.

Plan Assets. The Company’s target asset allocation for the year ending June 30, 2008 and actual asset allocation by asset category as of June 30, 2007, are as follows:

Target Asset Allocation Pension Benefits Other Retiree Benefits

Asset Category 2008 2008Equity securities 57% 96%Debt securities 41% 4%Real estate 2% —% Total 100% 100%


FINANCIAL REPORTING PROBLEM (Continued)

Asset Allocation at June 30 Pension Benefits Other Retiree Benefits

Asset Category 2007 2007Equity securities 56% 96%Debt securities 39% 4%Cash 3% —%Real estate 2% —% Total 100% 100%

These allocations appear in-line with the expected return assumptions for these two funds:

2007 Assumptions used to determine net periodic cost Pensions Other Retiree

Expected return on plan assets 7.2% 9.3%

As indicated, almost all of the assets in the Other Retiree Benefit fund are equity investments, which should earn higher (if not also riskier) returns than debt investments. The differences are consistent with the higher expected return assumption for Other Retiree Benefit funds. Thus, this information is useful to users of the financial statements in evalu-ating the pension plan’s exposure to market risk and possible cash flow demands on the company. In addition, it will help users to better under-stand and assess the reasonableness of the company’s expected rate of return assumption.


COMPARATIVE ANALYSIS CASE

(a) Coca-Cola sponsors and/or contributes to pension plans covering substantially all U.S. employees and certain employees in international locations. Coca-Cola also sponsors nonqualified, unfunded defined benefit plans for certain officers and other employees.

PepsiCo sponsors noncontributory defined benefit pension plans cover-ing substantially all full-time U.S. employees and certain international employees.

(b) Coca-Cola reported “net periodic benefit cost” of $108 million in 2007.

PepsiCo reported “pension expense” of $329 million in 2007 for U.S. plans.

(c) 2007 Funded Status ($millions) Pensions OPEB Coca-Cola ($ 89) ($ 192)PepsiCo ($266) ($1,354)

(d) Relevant rates used to compute pension information:

Coca-Cola PepsiCoDiscount rate (expense) 5.5% 5.8%Rate of increase in compensation levels 4.25% 4.7%Expected long-term rate of return on plan

assets 7.75% 7.8%


COMPARATIVE ANALYSIS CASE (Continued)

(e) Coca-Cola and PepsiCo provide the following disclosures on expected contributions and benefit payments (amounts in millions):

Coca-Cola

Cash FlowsInformation about the expected cash flow for our pension and other postretirement benefit plans is as follows:

Pension Benefits Other BenefitsExpected employer contributions:

2008 $ 52 $ 1Expected benefit payments:

2008 185 322009 168 342010 179 372011 177 402012 185 422013–2017 1,083 208

PepsiCo

Future Benefit PaymentsOur estimated future benefit payments to beneficiaries are as follows:

2008 2009 2010 2011 2012 2013–2017Pension $290 $315 $350 $385 $425 $2,755Retiree medical $ 95 $100 $105 $110 $115 $ 640

These benefit payments to beneficiaries include payments made from both funded and unfunded pension plans. The above payments exclude any discretionary contributions we may make. We expect such contri-butions to be approximately $75 million in 2008.

PepsiCo appears to have a much higher cash claim related to its post-retirement benefit plans with expected benefit payments than Coca-Cola’s. Thus, these disclosures provide information related to the cash outflows of the company. With this information, financial statement users can better understand the potential cash outflows related to the pension plan. As a result, users can better assess the liquidity and solvency of the company, which helps in assessing the company’s overall financial flexibility.


FINANCIAL STATEMENT ANALYSIS CASE

(a) The components of postretirement expense are service cost, interest cost, return on plan assets, amortization of prior service cost, and gains and losses. The expense for these plans is reporting in income from operations. Similar to pensions, the net pension asset for the postemployment benefit plan will be reported in Peake’s balance sheet, depending on whether there is a net debit or credit balance in the memorandum accounts related to the plan.

(b) The accounting for defined-benefit plans and OPEBs is very similar. For example, the measures of the obligation are similar and the com-ponents of expense and their calculation are the same (with similar smoothing mechanisms employed for both types of plans with respect to gains and losses.) There are, however, a number of differences between Postretirement Healthcare Benefits and Pensions:

Item Pensions Healthcare BenefitsFunding Generally funded. Generally NOT funded.Benefit Well-defined and level

dollar amount.Generally uncapped and

great variability.Beneficiary Retiree (maybe some

benefit to surviving spouse).

Retiree, spouse, and other dependents.

Benefit Payable Monthly. As needed and used.Predictability Variables are reasonably

predictable.Utilization difficult to

predict. Level of cost varies

geographically and fluctuates over time.

Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds under ERISA, the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits.

The lack of required funding is particularly relevant for OPEB plans compared to pensions. Generally, this results in a much higher un-funded OPEB obligation reported in the balance sheet. In addition, with fewer assets in OPEB plan, there is a lower credit associated with the return-on-asset component of OPEB expense.


INTERNATIONAL REPORTING CASE

(a) The key differences arise from the use of shorter amortization periods for (1) unrecognized prior service costs, and (2) unrecognized actuarial differences. These latter items likely reflect unrecognized gains and losses, and would include asset gains and losses. Under U.S. GAAP, amortization periods are based on remaining service lives of employees, which is probably longer than five or ten years.

One other difference that students might note are the relatively low discount rate and expected return assumptions used by this Japanese company. For example, Procter and Gamble (and many U.S. companies) use rates up to three times as high as the rates used by this Japanese company.

It should be noted that there are several similarities. Under Japanese GAAP, the pension obligation is measured based on the projected benefit obligation and amount recognized is based on an amount net of the liability and plan assets. There is smoothing of gains and losses. Also, the components of pension expense are similar.

(b) Shorter amortization periods will result in higher pension expense with respect to prior service costs. Depending on whether the company has unrealized gains or losses, the shorter amortization period for the actu-arial differences may result in either higher or lower reported income. On the balance sheet, there will be less non-recognition of the prior service costs and gains and losses. So the net pension asset or liability will be measured closer to the net of the liability and fund assets. The reported amounts on Japanese balance sheets will be more volatile, since the smoothing period is shorter.

(c) As indicated above, income and equity likely will be lower due to higher pension expense and lower net income. If there are significant asset gains (which is possible given the low expected return assumptions), then income could be higher as the gains are amortized into income more quickly. The lower discount rate used to measure the pension obligation will result in lower interest cost in income, but gives a higher measure of the projected benefit obligation.


PROFESSIONAL RESEARCH: FASB CODIFICATION

(a) According to FASB ASC 715-30-35:

35-22 Asset gains and losses are differences between the actual return on plan assets during a period and the expected return on plan assets for that period. Asset gains and losses include both changes reflected in the market-related value of plan assets and changes not yet reflected in the market-related value (that is, the difference between the fair value of assets and the market-related value). Gains or losses on trans-ferable securities issued by the employer and included in plan assets are also included in asset gains and losses. Asset gains and losses not yet reflected in market-related value are not required to be amortized under paragraphs 715-30-35-24 through 35-25.

35-24 As a minimum, amortization of a net gain or loss included in accumulated other comprehensive income (excluding asset gains and losses not yet reflected in market-related value) shall be included as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the minimum amortization shall be that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. The amortization must always reduce the beginning-of-the-year balance. Amortization of a net gain results in a decrease in net periodic pension cost; amortization of a net loss results in an increase in net periodic pension cost. If all or almost all of a plan’s participants are inactive, the average remaining life expectancy of the inactive participants shall be used instead of the average remaining service period.

(b) According to FASB ASC 715-30-35:

Gains and Losses

35-18 As established in the definition of the term, a gain or loss results from a change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or from a change in an actuarial assumption. This Subtopic generally does not distinguish between gains and losses that result from experience different from that assumed or from changes in assumptions. Gains and losses include amounts that have been realized, for example by sale of a security, as well as amounts that are unrealized.

35-19 Because gains and losses may reflect refinements in estimates as well as real changes in economic values and because some gains in one period may be offset by losses in another or vice versa, this Subtopic does not require recognition of gains and losses as components of net pension cost of the period in which they arise.

(c) According to FASB ASC 715-30-25:

25-1 If the projected benefit obligation exceeds the fair value of plan assets, the employer shall recognize in its statement of financial position a liability that equals the unfunded projected benefit obligation. If the fair value of plan assets exceeds the projected benefit obligation, the employer shall recognize in its statement of financial position an asset that equals the overfunded projected benefit obligation.


PRO

FESSION

AL SIM

ULATIO

N

Measurement(a)

A B C D E F G H I J K L M N56 General Journal Entries Memo Record7

Items


OCI—PriorService

Cost

OCI—Gain/Loss

PensionAsset/

Liability

ProjectedBenefitObligation Plan

assets89 Balance, Jan. 1, 2010 (145,000) (625,000) 480,000

10 Service cost 90,000 (90,000)11 Interest cost 56,250 (56,250)12 Actual /Expected return (52,000) (5,000) 57,00013 Amortization of PSC 19,000 (19,000)14 Contributions (99,000) 99,00015 Benefits 85,000 (85,000)16 Liability increase 76,000 (76,000)17 Journal entry for 2010 113,250 (99,000) (19,000) 71,000 (66,250)1819 Accumulated OCI, Dec. 31,

2009100,000 0

20 Balance, Dec. 31, 2010 81,000 71,000 (211,250) (762,250) 551,00021

Formula: (L9*.09)* –1

Formula: L9 + N9

Formula: B11* –1

Copyright ©

2010 John Wiley &

Sons, Inc. K




nly)20-87

PROFESSIONAL SIMULATION (Continued)

(b) Simply change the formula in cell B11 to multiply by .07; change the formula in cell B12 to multiply .10 times (N9* – 1).

Journal Entry

Other Comprehensive Income—Gain/Loss................... 71,000Pension Expense.............................................................. 113,250

Pension Asset /Liability........................................... 66,250Cash........................................................................... 99,000Other Comprehensive Income—PSC...................... 19,000

Disclosure

Financial StatementsIncome Statement

Pension expense...................................................... $113,250Balance SheetLiabilities

Pension liability........................................................ $211,250Stockholders’ Equity

Accumulated other comprehensive loss............... $152,000*

*($81,000 + $71,000)


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