ExercisesExercisesProblems 2.Identify types of pension plans and their 3.Explain alternative measures for valuing 4.List the components of pension expense.1, 2, 41, 2, 12, 13, ItemDescription E20-1Pension expense, journal entries.Simple 5Ð10 E20-2Computation of pension expense.Simple10Ð15 ItemDescription 1.A 7.One measure of the pension obligation is the This measure uses only is the actuarial present value of benefits attributed is based on vested and nonvested services using future 11.The (400,000) 18.An Corridor amortization Minimum pension liability$(100,000) 25.Compromises by the FASB to full capitalization or recognition in the financial statements of BenefitWell-defined and level dollar amount.Generally uncapped and great BenefitWell-defined and level dollar amount.Generally uncapped and great (Continued) *30. Service cost$358,000,000 Interest on PBO567,000,000 Pension expense$428,000,000 (80,000) General Journal EntriesMemo Record ExpenseCash 1/1/08250,000 Cr250,000 Dr Service cost27,500 Dr27,500 Cr Interest cost25,000 Dr25,000 Cr 17,500 Cr Journal entry27,500 Dr20,000 Cr7,500 Cr 12/31/087,500 Cr 285,000 Cr 277,500 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. 350 X $60 = $21,000 Project benefit obligation$(510,000) Accrued pension cost$ (61,000) Excess 145,000 Average remaining service lifeÖ 7.5 Minimum amortization$ 19,333 Accumulated benefit obligation$2,800,000 Minimum liability 800,000 Accrued pension cost 200,000 Additional liability$ 600,000 Minimum liability 980,000 Accrued pension cost 235,000 Additional liability required 745,000 Previous additional liability 600,000 Increase in additional liability$ 145,000 (a)Computation of pension expense: Service cost$ 60,000 Interest cost ($500,000 X .10) 50,000 Pension expense for 2007$106,000 (b)Pension Expense Service cost$ 90,000 Interest cost ($800,000 X 10%) 80,000 Pension expense for 2008$116,000 YearEdPaulMaryDaveCarolineTotal 20081 11115 20091 11115 20101 11115 11114 20121113 2013111 3 Computation of Annual Prior Service Cost Amortization 20085$2,400$12,000 200952,40012,000 201052,40012,000 201142,4009,600 201232,4007,200 201332,400 7,200 Projected Benefit Obligation (a) 20072,400,0002,500,000250,000280,0003,000 (b) 20082,900,0002,600,000290,000367,000 (c)6,417 (d) 20093,600,0003,000,000360,000370,583 (e)882 (f) (a)As of the beginning of the year. (b)($280,000 Ð $250,000) Ö 10 years = $3,000 (c)$280,000 Ð $3,000 + $90,000 = $367,000 (d)($367,000 Ð $290,000) Ö 12 years = $6,417 (e)$367,000 Ð $6,417 + $10,000 = $370,583 (f)($370,583 Ð $360,000) Ö 12 years = $882 (a)Note to financial statements disclosing components of 2008 pen Service cost$ 94,000 Interest cost 253,000 (b)The following schedule reconciles the funded status of the plan with Projected benefit obligation in excess of plan Accrued pension cost liability$ (207,991) Balance, Jan. 1, 20082,800 Cr.1,700 Dr.1,100 Dr. (a)Service cost400 Dr.400 Cr. (b)Interest cost280 Dr.280 Cr. 345 Cr.345 Dr. Journal entryÑ2008565 Dr. 800 Cr. 235 Dr. Balance, Dec. 31, 2008235 Dr. 345 Cr. 345 Dr. 3,645 Cr. 2,620 Dr. 1,045 Dr. 215 Dr. (b)$2,800 X 10% (c)$320 = ($2,620 Ð $1,700) Ð ($800 Ð $200) (e)$1,100 X 1/20 = $55 (h)$365 = $3,645 Ð ($2,800 + $400 + $280 Ð $200) (i)Accumulated benefit obligation, 12/31/08$(2,730) Minimum liability(110) Prepaid pension cost 235 Additional liability$ (345) (a)Additional Liability Computations 20072008 Accumulated benefit obligation$(260,000)$(370,000) Minimum liability(5,000)(70,000) Prepaid (accrued) pension cost 30,000 Additional liability to report(35,000)(25,000) Less: Beginning additional liability Ñ Additional liability to record$ (35,000) (b)2007 Pension expense$132,000 (b)Pension Expense ...................................... employerÕs contribution) (c)Income Statement: Pension expense$132,000 Accrued pension cost$31,000 Minimum liability computation:12/31/07 Accumulated benefit obligation$(830,000) Minimum liability$ (31,000) Additional liability (44,000) Unrecognized prior service cost 360,000 Contra equity charge$ 0 (a)Pension expense for 2007 composed of the following: Service cost$ 77,000 Interest on projected benefit obligation 200,000 Pension expense$312,000 (b)Pension Expense ........................ 62,000 employerÕs contribution) (c)Income Statement: Pension expense$312,000 Accrued pension cost$590,000 Minimum liability computation:12/31/07 Accumulated benefit obligation$(1,720,000) Minimum liability (590,000) Prepaid/accrued pension cost (62,000) Additional liability (528,000) Unrecognized prior service cost 1,085,000* Contra equity charge$ 0 Note: Beginning of year prior service cost must be $1,200,000, since (b)Computation of pension liability gains and losses and pension asset Liability loss$365 (c)Because no unrecognized 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 Beginning-of-the-Year YearPBO (d)Prior service cost amortization: $1,100 X 1/20 = $55 per year. (e)Pension expense for 2008: Service cost$400 Interest cost ($2,800 X 10%) 280 Pension expense for 2008$565 (f)Minimum liability computation: Accumulated benefit obligation, 12/31/08$(2,730) Minimum liability (110) ($800 Ð $565) 235 Additional liability$ (345) (g)Reconciliation schedule: Projected benefit obligation$(3,645) Funded status (1,025) ($1,100 Ð $55) Prepaid/accrued pension cost minimum liability (345) 1.Pension Expense ............................................................565 ..................................235 ...........................................................................800 Projected benefit obligation$(3,645) Funded status (1,025) Unrecognized prior service cost Prepaid pension cost Additional liability (345) Pension liability reported$ (110) (a)Computation of pension expense: Service cost$ 90,000 Interest cost ($700,000 X .10) 70,000 Pension expense for 2007$145,000 ................................. (b) Minimum liability computation: Accumulated benefit obligation$(400,000) Minimum liability (50,000) Prepaid (accrued) pension cost ($25,000 Ð $5,000) (20,000) Additional liability to report (30,000) Less: Beginning additional liability 10,000 Additional liability to record$ (20,000) (a)/(b)Journal EntriesÑ2007 ............................................................ 9 .................................. Prepaid/accrued pension cost at end of year$ 15,000 **Accumulated benefit obligation$(378,000) (minimum liability) (98,000) Prepaid pension cost 15,000 Additional liability required$(113,000) .................................. 2 *Prepaid/accrued pension cost at beginning of year$ 15,000 Contribution 150,000 Prepaid/accrued pension cost at end of year$ 37,000 Accumulated benefit obligation$(512,000) (minimum liability)$(114,000) Prepaid pension cost 37,000 Additional liabilityÑ2008 (151,000) Additional liabilityÑ2007 113,000 Additional liability requiredÑ2008$ (38,000) ........................ Prepaid/accrued pension cost at end of year$ 32,000 Accumulated benefit obligation$(576,000) 200720082009 Income Statement: Pension expense$ 95,000$128,000$130,000 Accrued pension cost*$ 98,000$114,000$ 0 (minimum liability)$ (110,000) (b)2007 ................................... 19,000 period) Prepaid/Accrued Pension Cost .......................... period) .......................... 23,000 period) (c)2007ÑNo entry necessary. Additional liability required$(103,000) (a)Actuarial present value of benefit obligations: Projected benefit obligation$(930,000) Prepaid/accrued pension cost (110,000) minimum liability (55,000) Accumulated benefit obligation$(865,000) (minimum liability)$(165,000) Prepaid/accrued pension cost (94,000) liability (71,000) Number of employees Average remaining service life per employee = 5,600 Ended December 31,Amount 2009(210,000) 2010(290,000) Benefit Obligation 20084,520,0002,200,000452,000300,0000 20094,980,0002,600,000498,000780,00020,143 (c) 20104,250,0003,040,000425,000549,857 (d)8,918 (e) (a)As of the beginning of the year. (b)The corridor is 10 percent of the greater of projected benefit obligation or plan 2008110,000($1,155,000 Ö 10.5 years) December 31,Amount 2008(24,000) Benefit 20083,650,0002,900,000365,000101,000Ð0Ð (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 Pension expense$648,000 Service cost$475,000 Interest on projected benefit obligation 292,000 Pension expense$587,000 Service cost$ 88,000 Service cost$ 90,000 Funded status (Credit) (300,000) Unrecognized prior service cost (Debit) 60,000 Funded status (Credit) (300,000) Unrecognized prior service cost (Debit) Unrecognized loss (Debit) 20,000 (Time 40Ð50 minutes) Purpose Problem 20-2 (Time 45Ð55 minutes) Purpose yearsÕ pension transactions, three years of general journal entries for the pension plan, and a reconciliation schedule at the end of each year. PurposeÑto provide a problem that requires computation of the annual pension expense, preparation PurposeÑto provide a problem that requires computation of pension expense, preparation of the pension journal entries, and adjustment to the minimum liability. Problem 20-6 (Time 45Ð60 minutes) Purpose Problem 20-7 (Time 35Ð45 minutes) Problem 20-8 (Time 45Ð60 minutes) *Problem 20-10 (Time 30Ð35 minutes) Projected benefit obligation$(222,000) Prepaid/accrued pension cost$ 0 Projected benefit obligation$(422,800) Accrued pension cost$ (49,700) Projected benefit obligation$(520,000) Accrued pension cost$ (85,130) (a)Pension expense for 2007 comprises the following: Service cost$52,000 (10% X $350,000) 35,000 Pension expense$81,286 )**Amortization: $150,000 Ö 10.5 years = $14,286 (b)Journal EntriesÑ2007 Pension Expense Prepaid/accrued pension cost at end of year$(16,286) Accumulated benefit obligation$(365,000) (minimum liability) (89,000) Accrued pension cost (16,286) Additional liability required$ (72,714) (d)2007 Increase/Decrease in Unrecognized Gains/Losses (1)12/31/07 new actuarially computed PBO$452,000 per memo record: 1/1/07 PBO$350,000 Add interest (10% X $350,000) 35,000 Add service cost (given) 52,000 Less benefit payments 0 Liability loss$15,000 Unrecognized net loss at 12/31/07$24,000 (e)Reconciliation of Pension-Related Amounts Projected benefit obligation$(452,000) Prepaid/accrued pension cost (16,286) Additional pension liability (72,714) recognized in financial statements: additional pension liability, $72,714, plus accrued pension cost, $16,286)$ (89,000) (a)Computation of pension expense: 20072008 $ 60,000$ 90,000 and ($700,000 X .09)54,00063,000 20072008 100,000135,000 110,000120,000 10,00015,000 (c)Minimum liability computation: 20072008 Accumulated benefit obligation$(500,000)$(550,000) Minimum liability(120,000)(85,000) Additional liability to report(90,000)(40,000) Less: Beginning additional liability (50,000) Additional liability to record$ (40,000) (d)2007 (a)Pension expense for 2007 consisted only of the service cost component amounting to $55,000. There were no unrecognized prior service cost, unrecognized net gain or loss, pension assets, or projected benefit obligation as of January 1, 2007. Service cost$85,000 Interest on projected benefit obligation 6,050 Pension expense$86,050 Service cost$119,000 Interest on projected benefit obligation 16,000 Pension expense$131,829 Year Benefit 200855,00050,0005,50000 2009200,00085,00020,00083,9505,329 (c) (a)As of the beginning of the year. (b)The corridor is 10 percent of the greater of the projected benefit obligation or (b)Journal EntriesÑ2007 ............................ Unrecognized Prior Service Cost* ($165,000 Ð $85,000)$(80,000) ($5,000 + $26,050) (31,050) Additional liability$(48,950) *Note: Since there are no unrecognized prior service costs, the adjust- be reported as a component of accumulated other comprehensive Journal EntriesÑ2009 Unrecognized Prior Service Cost ............................... Additional Pension Liability reflect minimum liability) ($292,000 Ð $170,000)$(122,000) ($31,050 + $36,829) (67,879) liability (48,950) reflect minimum pension liability$ (5,171) 200720082009 of year$ 0$ (5,000)$ (31,050 Contribution 50,000 Prepaid/accrued pension cost at end of year$ (5,000) accumulated benefit obligation)$ 0 liability: Additional liability$ 0 service cost)$ 0 (a)Prior Service Cost Amortization 2007$153,846($2,000,000 Ö 13 years) 2008153,846($2,000,000 Ö 13 years) 2009153,846($2,000,000 Ö 13 years) (b)Pension expense for 2007 comprised the following: Service cost$200,000 Interest on projected benefit obligation* 500,000 Pension expense$553,846 Prepaid pension cost at end of year$ 21,154 .................................. 21,154 *Accumulated benefit obligation$(4,025,000) Unfunded ABO (minimum liability) (125,000) Prepaid pension cost 21,154 Additional liability$ (146,154) Liability gain (950,000) Amortization in 2007: None because there was no beginning balance. Projected Benefit Obligation Fair Value 20084,750,0003,900,000475,000(975,000) (e)Reconciliation Schedule 2007 Projected benefit obligation$(4,750,000) Prepaid/accrued pension cost minimum liability (146,154) (i)Computation of minimum liability Accumulated benefit obligation 12/31/09$(671,000) (minimum liability) (50,000) (balance 12/31/09) (43,100) Additional liability required (6,900) Unrecognized prior service cost 56,000 Contra equity charge$ 0 Balance, Jan. 1, 2009725,000 Cr.520,000 Dr.81,000 Dr.91,000 Dr. (a)Service cost108,000 Cr. (b)Interest cost65,250 Cr. Balance, Dec. 31, 2009813,250 Cr. $5,000 = ($410,000 X 10%) Ð $36,000; expected return exceeds actual return. (i)(r)Minimum Liability Computation: 20082009 Accumulated benefit obligation$(721,800)$(789,000) (235,300)(214,500) Prepaid (accrued) pension cost (142,000) Additional liability(93,300)(6,552) Unrecognized prior service cost 90,000 Contra equity charge$ (3,300) (k)$81,050 = $810,500 X 10%. (m)$12,350 = ($486,500 X 10%) Ð $61,000; actual return exceeds expected return. (q)2009 Corridor Test: Amortizable amount$10,950 2009 amortization ($10,950 Ö 20 years)$548 (b)2008 Prepaid/Accrued Pension Cost ........................................... 86,748 Projected benefit obligation$(896,550) Prepaid/accrued pension cost (207,948) Adjustment required to recognize minimum liability (6,552) (Time 30Ð35 minutes) Purpose The student is required to explain the significance of such items as prepaid pension CA 20-4 (Time 30Ð35 minutes) Purpose The student is required to identify the five components of pension expense, the given a number of different factual situations. This case is quite thought-provoking and should PurposeÑto provide the st udent with the opportunity to explain unrecognized gains and losses, CA 20-7 (Time 20Ð30 minutes) (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 7.The company must disclose the to be paid to current plan years thereafter, based on the same assumptions used to measure the companyÕs benefit (a)Pension benefits are part of the compensation received by employees for their services. The 2.In order to decrease the volatility of the reporting of the pension gains or losses, the FASB (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 ()Note that the unamortized portion of the gain/loss from the previous year is combined with the current In the attached schedule, the unamortized loss from 2005 ($278,000) was added to the 2005 loss of ()Finally, if the losses from 2006 are added to the unamortized portion of the unrecognized loss from Projected Benefit Obligation (a) 20052,400,0002,600,000260,000280,0002,000 (b) 20062,900,0002,600,000290,000368,000 (c)6,500 (d) 20073,900,0003,000,000390,000373,500 (e)0 (a)As of the beginning of the year. (b)($280,000 Ð $260,000) Ö 10 years = $2,000 (c)$280,000 Ð $2,000 + $90,000 = $368,000 (d)($368,000 Ð $290,000) Ö 12 years = $6,500 (e)$368,000 Ð $6,500 + $12,000 = $373,500 While Selma may be correct in assuming that the termination of nonvested employees would decrease a reasonable approach to correcting the underfunding of College ElectronixÕs pension plan. Arbitrarily to avoid capitalizing a liability and recognizing expenses is a capricious and unsound business decision. Pension Benefits Other Retiree Benefits Asset Category20052005 Equity securities64%99% Debt securities32%1% Real estate4%Ñ% Total100%100% Plan Asset Allocation at June 30 Pension Benefits Other Retiree Benefits Asset Category20042004 Equity securities64%99% Debt securities32%1% Real estate4%Ñ% Total100%100% These allocations appear in-line with the expected return assumptions for these two funds: higher expected return assumption for Other Retiree Benefit funds. Thus, this information is useful to users of the financial statements in BenefitWell-defined and level (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 PepsiCo sponsors noncontributory defined benefit pension plans cover- Coca-Cola($403,000)($791,000) PepsiCo($930,000)($1,319,000) (d)Relevant rates used to compute pension information: Coca-ColaPepsiCo Discount rate (expense)6.0%6.1% Rate of increase in compensation levels4.25%4.4% (e)Coca-Cola and PepsiCo provide the following disclosures on expected 2005$114$ 9 200513030 200612132 200712635 200812837 200912940 2010Ð2014706236 Pension$215$220$235$255$280$1,855 (a)The key differences arise from the use of shorter amortization periods (a)Companies record a credit to Òcomponents of net pension cost;Ó Òrecognition of liabilities and assets,Ó Òpension costÓ Balance, Jan. 1, 2008 0810,000 Cr.710,000 Dr.100,000 Dr. (a)Service cost90,000 Dr.90,000 Cr. (b)Interest cost*72,900 Dr.72,900 Cr. Journal entry for 2008103,900 Dr. 16,000 Cr. 87,900 Cr. Balance, Dec. 31, 200887,900 Cr. 932,900 Cr. 748,000 Dr. 97,000 Dr. ExpenseCash Obligation Balance, Jan. 1, 20084,200,000 Cr.4,200,000 Dr. (a)Service cost150,000 Dr.150,000 Cr. (b)Interest cost420,000 Dr.420,000 Cr. 200,000 Dr.200,000 Cr. Journal entry, 12/31/08318,000 Dr. 140,000 Cr. 178,000 Cr. Balance, Dec. 31, 2008178,000 Cr. 4,570,000 Cr.4,392,000 Dr. (f)Prior service cost, 500,000 Cr. (g)Service cost180,000 Dr.180,000 Cr. (h)Interest cost507,000 Dr.507,000 Cr. 280,000 Dr.280,000 Cr. Journal entry, 12/31/09425,640 Dr. 185,000 Cr. 240,640 Cr. Balance, Dec. 31, 2009418,640 Cr. 5,477,000 Cr. 4,557,000 Dr. 410,000 Dr. (b)$420,000 = $4,200,000 X 10%. (h)$507,000 = $5,070,000 X 10%. (j)$91,360 = ($4,392,000 X .08) Ð $260,000. (b)Reconciliation ScheduleÑ12/31/09 Projected benefit obligation$(5,477,000) Funded status(920,000) Unrecognized prior service cost410,000 Accrued pension cost liability$ (418,640) ExpenseCash Balance, January 1, 2008490,000 Cr.490,000 Dr. (a)Service cost40,000 Dr.40,000 Cr. (b)Interest cost41,650 Dr.41,650 Cr. 33,400 Dr.33,400 Cr. Journal entry, December 3131,950 Dr. Balance, December 31, 20081,950 Cr. (b)$41,650 = $490,000 X .085. *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. (a)Katie Day Company ExpenseCash Benefit Balance, Jan. 1, 2008200,000 Cr.200,000 Dr. (a)Service cost16,000 Dr.16,000 Cr. (b)Interest cost20,000 Dr.20,000 Cr. 14,000 Dr.14,000 Cr. Journal entry, 12/31/0816,000 Dr. 16,000 Cr. Balance, Dec. 31, 2008222,000 Cr.219,000 Dr.3,000 Dr. (g)Prior service cost, 1/1/09160,000 Cr. 160,000 Dr. Balance, Jan. 1, 2009382,000 Cr.219,000 Dr.3,000 Dr.160,000 Dr. (h)Service cost19,000 Dr.19,000 Cr. (i)Interest cost38,200 Dr.38,200 Cr. 16,400 Dr.16,400 Cr. Journal entry, 12/31/0989,700 Dr. 40,000 Cr. 49,700 Cr. Balance, Dec. 31, 200949,700 Cr. 422,800 Cr.264,500 Dr.3,000 Dr.105,600 Dr. (n)Service cost26,000 Dr.26,000 Cr. (o)Interest cost42,280 Dr.42,280 Cr. 49,920 Cr.49,920 Dr. Journal entry, 12/31/1083,430 Dr. 48,000 Cr. 35,430 Cr. Balance, Dec. 31, 201085,130 Cr. 520,000 Cr. 315,500 Dr. 55,370 Dr. 64,000 Dr. ExpenseCash (a)Service cost77,000 Dr.77,000 Cr. (b)Interest cost200,000 Dr.200,000 Cr. 200,000 Dr.200,000 Cr. Journal entry, Dec. 31312,000 Dr. 250,000 Cr. 62,000 Cr. Balance, Dec. 31, 200762,000 Cr. 2,077,000 Cr. 1,130,000 Dr. 1,085,000 Dr. 200,000 Cr. **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 ExpenseCash Pension Intangible (a)Service cost108,000 Dr.33,000 Cr. (b)Interest cost65,250 Dr. 6,900 Cr.6,900 Dr. Journal entry148,100 Dr. 138,000 Cr. 10,100 Cr. Balance, Dec. 31, 200943,100 Cr. (b)$65,250 = $725,000 X .09.( (d)$4,000 = ($520,000 X .10) Ð $48,000. 1/1 Projected (a)Glesen Company ExpenseCash Liability Intangible Balance, Jan. 1, 2008 80,000 Cr.12,300 Cr.12,300 Dr. (a)Service cost40,000 Dr. (b)Interest cost65,000 Dr. 81,000 Cr.77,700 Dr.3,300 Dr. Journal entry for 2008134,000 Dr. Balance, Dec. 31, 2008142,000 Cr.93,300 Cr.90,000 Dr.3,300 Dr. (j)Service cost59,000 Dr. (k)Interest cost81,050 Dr. 86,748 Dr.83,448 Cr.3,300 Cr. Journal entry for 2009146,948 Dr. Balance, Dec. 31, 2009207,948 Cr. 0 Benefit Balance, Jan. 1, 2008650,000 Cr.410,000 Dr.160,000 Dr. (a)Service cost40,000 Cr. (b)Interest cost65,000 Cr. Balance, Dec. 31, 2008810,500 Cr.486,500 Dr.90,000 Dr.92,000 Dr. (j)Service cost59,000 Cr. (k)Interest cost81,050 Cr. Balance, Dec. 31, 2009896,550 Cr. Obligation Balance, Jan. 1, 20064,500,000 Cr.4,500,000 Dr. (a)Service cost150,000 Dr.150,000 Cr. (b)Interest cost450,000 Dr.450,000 Cr. 220,000 Dr.220,000 Cr. Journal entry, 12/31/06330,000 Dr. 150,000 Cr. 180,000 Cr. Balance, Dec. 31, 2006180,000 Cr. 4,880,000 Cr.4,682,000 Dr.18,000 Dr. (g)Prior service cost, 1/1/07600,000 Cr.600,000 Dr. (h)Service cost170,000 Dr.170,000 Cr. (i)Interest cost548,000 Dr.548,000 Cr. 280,000 Dr.280,000 Cr. Journal entry, 12/31/07433,440 Dr. 184,658 Cr. 248,782 Cr. 428,782 Cr. 5,918,000 Cr. 4,836,658 Dr. 510,000 Dr. 142,560 Dr. (b)$450,000 = $4,500,000 X 10%. (d)$18,000 = ($4,500,000 X 6%) Ð $252,000. (i)$548,000 = ($4,880,000 + $600,000) X 10%. (k)$124,560 = ($4,682,000 X .08) Ð $250,000. Projected benefit obligation$(5,918,000) Unfunded PBO (funded status)(1,081,342) Unrecognized prior service cost510,000 Accrued pension cost liability$ (428,782) Dusty Hass Foods Inc. Balance, Jan. 1, 2008200,000 Cr.200,000 Dr. (a)Service cost70,000Dr.70,000 Cr. (b)Interest cost18,000Dr.*18,000 Cr. 44,000 Dr.44,000 Cr. Journal entry, Dec. 3179,000Dr. 60,000 Cr. 19,000 Cr. 19,000 Cr. 244,000 Cr. 231,000 Dr. 6,000 Cr. (b)Reconciliation ScheduleÑDecember 31, 2008 Funded status (Credit)(13,000) ExercisesExercisesProblems 2.Identify types of pension plans and their 3.Explain alternative measures for valuing 4.List the components of pension expense.1, 2, 41, 2, 6, 12, 13, ItemDescription E20-1Pension expense, journal entries.Simple 5Ð10 E20-2Computation of pension expense.Simple10Ð15 25.Compromises by the FASB to full capitalization or recognition in the financial statements of BenefitWell-defined and level dollar amount.Generally uncapped and great BenefitWell-defined and level dollar amount.Generally uncapped and great (a)Buhl Corp. ExpenseCash Balance, January 1, 200845,000 Cr.625,000 Cr.480,000 Dr.100,000 Dr. (a)Service cost90,000 Dr.90,000 Cr. (b)Interest cost56,250 Dr.56,250 Cr. 85,000 Dr.85,000 Cr. Journal entry113,250 Dr. 99,000 Cr. 14,250 Cr. Balance, December 31, 200859,250 Cr. 762,250 Cr. 551,000 Dr. 81,000 Dr. 71,000 Dr. (b)$56,250 = $625,000 X .09. Projected benefit obligation (Credit)$(762,250) Funded status (211,250) Unrecognized prior service cost (Debit)81,000 Prepaid/Accrued Pension CostÑLiability$ (59,250) Liability loss$365 (c)Because no unrecognized 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 ExpenseCash Obligation Balance, Jan. 1, 20084,200,000 Cr.4,200,000 Dr. (a)Service cost150,000 Dr.150,000 Cr. (b)Interest cost420,000 Dr.420,000 Cr. 200,000 Dr.200,000 Cr. Journal entry, 12/31/08318,000 Dr. 140,000 Cr. 178,000 Cr. Balance, Dec. 31, 2008178,000 Cr.4,570,000 Cr.4,392,000 Dr. (f)Prior service cost, 500,000 Cr. (g)Service cost180,000 Dr.180,000 Cr. (h)Interest cost507,000 Dr.507,000 Cr. 280,000 Dr.280,000 Cr. Journal entry, 12/31/09425,640 Dr. 185,000 Cr. 240,640 Cr. Balance, Dec. 31, 2009418,640 Cr. 5,477,000 Cr. 4,557,000 Dr. 410,000 Dr. (b)$420,000 = $4,200,000 X 10%. (h)$507,000 = $5,070,000 X 10%. (j)$91,360 = ($4,392,000 X .08) Ð $260,000. (b)Reconciliation ScheduleÑ12/31/09 Projected benefit obligation$(5,477,000) Funded status(920,000) Unrecognized prior service cost410,000 Accrued pension cost liability$ (418,640) (a)Katie Day Company ExpenseCash Benefit Balance, Jan. 1, 2008200,000 Cr.200,000 Dr. (a)Service cost16,000 Dr.16,000 Cr. (b)Interest cost20,000 Dr.20,000 Cr. 14,000 Dr.14,000 Cr. Journal entry, 12/31/0816,000 Dr. 16,000 Cr. Balance, Dec. 31, 2008222,000 Cr.219,000 Dr.3,000 Dr. (g)Prior service cost, 1/1/09160,000 Cr. 160,000 Dr. Balance, Jan. 1, 2009382,000 Cr.219,000 Dr.3,000 Dr.160,000 Dr. (h)Service cost19,000 Dr.19,000 Cr. (i)Interest cost38,200 Dr.38,200 Cr. 16,400 Dr.16,400 Cr. Journal entry, 12/31/0989,700 Dr. 40,000 Cr. 49,700 Cr. Balance, Dec. 31, 200949,700 Cr.422,800 Cr.264,500 Dr.3,000 Dr.105,600 Dr. (n)Service cost26,000 Dr.26,000 Cr. (o)Interest cost42,280 Dr.42,280 Cr. 49,920 Cr.49,920 Dr. Journal entry, 12/31/1083,430 Dr. 48,000 Cr. 35,430 Cr. Balance, Dec. 31, 201085,130 Cr. 520,000 Cr. 315,500 Dr. 55,370 Dr. 64,000 Dr. Obligation Balance, Jan. 1, 20064,500,000 Cr.4,500,000 Dr. (a)Service cost150,000 Dr.150,000 Cr. (b)Interest cost450,000 Dr.450,000 Cr. 220,000 Dr.220,000 Cr. Journal entry, 12/31/06330,000 Dr. 150,000 Cr. 180,000 Cr. Balance, Dec. 31, 2006180,000 Cr.4,880,000 Cr.4,682,000 Dr.18,000 Dr. (g)Prior service cost, 1/1/07600,000 Cr.600,000 Dr. (h)Service cost170,000 Dr.170,000 Cr. (i)Interest cost548,000 Dr.548,000 Cr. 280,000 Dr.280,000 Cr. Journal entry, 12/31/07433,440 Dr. 184,658 Cr. 248,782 Cr. 428,782 Cr. 5,918,000 Cr. 4,836,658 Dr. 510,000 Dr. 142,560 Dr. (b)$450,000 = $4,500,000 X 10%. (d)$18,000 = ($4,500,000 X 6%) Ð $252,000. (i)$548,000 = ($4,880,000 + $600,000) X 10%. (k)$124,560 = ($4,682,000 X .08) Ð $250,000. Projected benefit obligation$(5,918,000) Unfunded PBO (funded status)(1,081,342) Unrecognized prior service cost510,000 Accrued pension cost liability$ (428,782) (Time 30Ð35 minutes) Purpose The student is required to explain the significance of such items as prepaid pension CA 20-4 (Time 30Ð35 minutes) Purpose The student is required to identify the five components of pension expense, the given a number of different factual situations. This case is quite thought-provoking and should PurposeÑto provide the st udent with the opportunity to explain unrecognized gains and losses, CA 20-7 (Time 20Ð30 minutes) (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 7.The company must disclose the to be paid to current plan years thereafter, based on the same assumptions used to measure the companyÕs benefit (a)Pension benefits are part of the compensation received by employees for their services. The 2.In order to decrease the volatility of the reporting of the pension gains or losses, the FASB (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 ()Note that the unamortized portion of the gain/loss from the previous year is combined with the current In the attached schedule, the unamortized loss from 2005 ($278,000) was added to the 2005 loss of ()Finally, if the losses from 2006 are added to the unamortized portion of the unrecognized loss from Projected Benefit Obligation (a) 20052,400,0002,600,000260,000280,0002,000 (b) 20062,900,0002,600,000290,000368,000 (c)6,500 (d) 20073,900,0003,000,000390,000373,500 (e)0 (a)As of the beginning of the year. (b)($280,000 Ð $260,000) Ö 10 years = $2,000 (c)$280,000 Ð $2,000 + $90,000 = $368,000 (d)($368,000 Ð $290,000) Ö 12 years = $6,500 (e)$368,000 Ð $6,500 + $12,000 = $373,500 While Selma may be correct in assuming that the termination of nonvested employees would decrease a reasonable approach to correcting the underfunding of College ElectronixÕs pension plan. Arbitrarily to avoid capitalizing a liability and recognizing expenses is a capricious and unsound business decision. Pension Benefits Other Retiree Benefits Asset Category20052005 Equity securities64%99% Debt securities32%1% Real estate4%Ñ% Total100%100% Plan Asset Allocation at June 30 Pension Benefits Other Retiree Benefits Asset Category20042004 Equity securities64%99% Debt securities32%1% Real estate4%Ñ% Total100%100% These allocations appear in-line with the expected return assumptions for these two funds: higher expected return assumption for Other Retiree Benefit funds. Thus, this information is useful to users of the financial statements in BenefitWell-defined and level (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 PepsiCo sponsors noncontributory defined benefit pension plans cover- Coca-Cola($403)($791) PepsiCo($930)($1,319) (d)Relevant rates used to compute pension information: Coca-ColaPepsiCo Discount rate (expense)6.0%6.1% Rate of increase in compensation levels4.25%4.4% (e)Coca-Cola and PepsiCo provide the following disclosures on expected 2005$114$ 9 200513030 200612132 200712635 200812837 200912940 2010Ð2014706236 Pension$215$220$235$255$280$1,855 (a)The key differences arise from the use of shorter amortization periods (a)Companies record a credit to Òcomponents of net pension cost;Ó Òrecognition of liabilities and assets,Ó Òpension costÓ Prepaid/Accrued Pension Cost Projected Benefit Obligation$(762,250) Prepaid/Accrued Pension Cost$ (59,250) !"# $$$$$$$$$$$$%& ' $$$$$$$$ & $$$$$$$$$ & $$$$$$$ $$$$$$$$$$$% & ' $$$$$$$$$$$%& ' $$$$$$$$$$& $$$$$$$$$$$%& ' $$$$$$$$$& $$$$$$$$$$$%& ' $$$$$$$$$$& $$$$$$$$$$$$ $$$$$$$$$%& ' $$$$$$$$$%& ' $$$$$$$$$$$$%& ' $$$$$$$$& $$$$$$$$$& $$$$$$$$$& ItemDescription E20-1Pension expense, journal entries.Simple 5Ð10 E20-2Computation of pension expense.Simple10Ð15 1.A
CHAPTER 20