1.
Compute the amount of pension expense of Company L for 2016 and 2017.
1.
Explanation of Solution
Pension plan: Pension plan is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.
Compute the amount of pension expense of Company L for 2016 and 2017 as follows:
Particulars | 2016 | 2017 |
Service cost | $463,000 | $475,000 |
Add: Interest cost on projected benefit obligation | $111,600 (1) |
$163,314 (2) |
Less: Expected return on plan assets | $0 | ($62,100) (3) |
Add: Amortization of prior service cost | $96,000 (4) | $92,000 (5) |
Pension expense | $670,600 | $668,214 |
Table (1)
Working note (1):
Calculate the interest cost on projected benefit obligation for 2016:
Working note (2):
Calculate the interest cost on projected benefit obligation for 2017:
Working note (3):
Calculate the expected return on plant assets:
Working note (4):
Calculate the amortization of prior service cost for 2016.
Working note (5):
Calculate the amortization of prior service cost for 2017.
2.
Prepare necessary journal entries of Company L for 2016 and 2017.
2.
Explanation of Solution
Prepare
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
January 1, 2016 | Other comprehensive income: Prior service cost | 1,240,000 | ||
Accrued/prepaid pension cost | 1,240,000 | |||
(To record the beginning liability for prior service cost for 2016) |
Table (2)
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the other comprehensive income: Prior service cost account with $1,240,000.
- Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,240,000.
Prepare journal entry to record the pension expense for 2016:
In this case, Company L has overfunded the pension contribution by $19,400
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2016 | Pension expense | 670,600 | ||
Accrued/prepaid pension cost | 19,400 | |||
Cash | 690,000 | |||
(To record the pension expense and its overfunded by $19,400) |
Table (3)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $670,600.
- Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $19,400.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $690,000.
Prepare journal entry to record the amortized prior service cost for 2016:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2016 | Accrued/prepaid pension cost | 96,000 | ||
Other comprehensive income: Prior service cost | 96,000 | |||
(To record the amortization of prior service cost) |
Table (4)
- Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $96,000.
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $96,000.
Prepare journal entry to record the pension expense for 2017:
In this case, Company L has underfunded the pension contribution by $8,214
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2017 | Pension expense | 668,214 | ||
Cash | 660,000 | |||
Accrued/prepaid pension cost | 8,214 | |||
(To record the underfunded pension expense of $24,250) |
Table (5)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $668,214.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $660,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $8,214.
Prepare journal entry to record the amortized prior service cost for 2017:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2017 | Accrued/prepaid pension cost | 92,000 | ||
Other comprehensive income: Prior service cost | 92,000 | |||
(To record the amortization of prior service cost) |
Table (6)
- Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $92,000.
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $92,000.
3.
Calculate the total accrued/prepaid pension cost at the end of 2017, and identify whether it is considered as an asset or a liability.
3.
Explanation of Solution
Calculate the total accrued/prepaid pension cost as the end of 2017, and identify whether it is considered as an asset or a liability as follows:
Accrued/prepaid pension cost | |||
December 31, 2016 | $19,400 | January 1, 2016 | $1,240,000 |
December 31, 2016 | $96,000 | December 31, 2017 | $8,214 |
December 31, 2017 | $92,000 | ||
Total | $207,400 | Total | 1,248,214 |
Clos. Bal. | $1,040,814 |
In this case, the total accrued/prepaid pension cost at the end of 2017 shows the credit balance, hence it is considered as the accrued pension cost liability ($1,040,814).
4.
Prepare a schedule that portrait the beginning and ending reconciliation amounts of the projected benefit obligation for 2017.
4.
Explanation of Solution
Prepare a schedule that portrait the beginning and ending reconciliation amounts of the projected benefit obligation for 2017 as follows:
Particulars | Amounts ($) |
Beginning projected benefit obligation | 1,240,000 |
Add: Service cost | 463,000 |
Interest cost | 111,600 |
Ending projected benefit obligation | 1,814,600 |
Table (7)
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