Chapter 20 PENSIONS Day 1

Rebekah Co. provides following info about its defined benefit pension plan for the year 2011.

• Service cost…………………… $ 90,000

• Contribution to plan………….$105,000

• Prior service cost amortization.. $10,000

• Actual and expected return on P.A. $64,000

• Benefits paid…………………… $40,000

• Plan assets at 1/1/11………………………$640,000

• Projected Benefit Obligation at 1/1/11…. $800,000

• AOCI (PSC) at 1/1/11…………………..… $150K

• Interest/discount (settlement) rate…………. 10%

Compute the pension expense for the year 2011.

ervice Cost:

nterest Cost

eturn on Plan Assets (actual)

rior Service Cost Amortization

ain

r

oss Component

$90,000

$80,000 Beg PBO x i/r

$800K x .10

$64,000( )

$10,000

Compute the pension expense for the year 2011.

ervice Cost:

nterest Cost

eturn on Plan Assets (actual)

rior Service Cost Amortization

ain

r

oss Component

$90,000

$80,000 Beg PBO x i/r

$800K x .10

$64,000( )

$10,000

$116,000

Using information from E 20-2 prepare a PENSION WORKSHEETinserting 1/1/11 balances, showing December 31, 11 balancesand the journal entry recording pension expense.

What does the LEFT side of the PWS show?

FORMAL ENTRIES? which means?

They get shown on the Balance Sheet,Income Statement or Comprehensive Income Statement

What does the RIGHT side of the PWS show?

INFORMAL ENTRIES? which means?

They get put in the footnotes

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

Start by filling in 1/1/11 figures……….

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$800,000Cr $640,000Dr

Dr.OCIPSC

$160,000Cr

They have outstanding debt of $800,000but have set aside $640,000 to cover it.

Thus they must show a pensionLiability of $160,000.

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$800,000Cr $640,000Dr

Dr.OCIPSC

$160,000Cr

$90,000 Dr $90,000 Cr

$80,000 Dr $80,000 Cr

$64,000 Cr. $64,000 Dr.

Amtz ofPSC

$10,000 Dr. $10,000 Cr.

$105K Cr $105K Dr

Benefits Paid

$40,000 Dr $40,000 Cr

Jrn ent. $116,000 Dr

105K Cr 10,000 Cr

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$800,000Cr $640,000Dr

Dr.OCIPSC

$160,000Cr

$90,000 Dr $90,000 Cr

$80,000 Dr $80,000 Cr

$64,000 Cr. $64,000 Dr.

Amtz ofPSC

$10,000 Dr. $10,000 Cr.

$105K Cr $105K Dr

Benefits Paid

$40,000 Dr $40,000 Cr

Jrn ent. $116,000 Dr

105K Cr 10,000 Cr

Pension Expense….$116,000Cash……………….$105,000AOCI (PSC)………$10,000Pension Asset/Liab $ 1,000

$1,000 Cr

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$800,000Cr $640,000Dr

Dr.OCIPSC

$160,000Cr

$90,000 Dr $90,000 Cr

$80,000 Dr $80,000 Cr

$64,000 Cr. $64,000 Dr.

Amtz ofPSC

$10,000 Dr. $10,000 Cr.

$105K Cr $105K Dr

Benefits Paid

$40,000 Dr $40,000 Cr

Jrn ent. $116,000 Dr 105K Cr 10,000 Cr$1,000 Cr

Acc OCI 12/31/10 $150,000Dr.

Bal 12/31/11 $140,000Dr $930,000 Cr $769,000Dr

Pension Expense….$116,000Cash……………….$105,000AOCI (PSC)………$10,000Pension Asset/Liab $ 1,000

Items

DrPensionExpense

CrPensionAsset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$800,000Cr $640,000Dr

Dr.OCIPSC

$160,000Cr

$90,000 Dr $90,000 Cr

$80,000 Dr $80,000 Cr

$64,000 Cr. $64,000 Dr.

Amtz ofPSC

$10,000 Dr. $10,000 Cr.

$105K Cr $105K Dr

Benefits Paid

$40,000 Dr $40,000 Cr

Jrn ent. $116,000 Dr 105K Cr 10,000 Cr$1,000 Cr

Acc OCI 12/31/10 $150,000Dr.

Bal 12/31/11 $140,000Dr $930,000 Cr $769,000Dr$161.000Cr

Reconciliation:

$930,000 CR- $769,000 DR-------------------$161,000 CR

The following facts apply to pension of Trudy Borke for year 11:

Plan assets 1/1/11………………….. $490KPBO (1/1/11)………………………… 490KSettlement rate………………………. 8.5%Annual pension service cost………. $40,000Contributions (funding)…………… $30,000Actual return on plan assets……….. $49,700Benefits paid to retirees……………. $33,400

Required: Using data above, compute pension expense for 11by doing a PWS.

Items

DrPensionExpense

CrPension Asset/Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$490,000 $490,000

40,000Dr 40,000Cr

$41,650Dr ($490K x .085) $41,650Cr

$49,700Cr $49,700Dr

30,000Cr 30,000Dr

Benefits paid 33,400Cr 33,400Dr

Journal: $31,950Dr $30,000Cr $1,950Cr

$1,950Cr $538,250Cr $536,300Dr

The following defined pension data of Doreen Corp. applyto the year 11.

PBO (1/1/11 before amendment)…….. $560,000Plan assets (1/1/11)……………………. 546,200Pension liability................. …………. 13,800 On 1/1/11 through amendment, grantsprior service benefits with PV of……. 100,000Settlement Rate……………………… 9%Annual pension service cost………….. 58,000Contributions (funding)……………… 55,000Actual (expected) return on P.A…. 52,280Benefits paid to retirees…………….. 40,000Prior service cost amortization for 11 17,000

Required: Prepare PWS.

Items

DrPensionExpense

CrPension Asset-Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$13,800Cr $560,000Cr $546,200Dr

DrOCI-PSC

58,000Dr 58,000Cr

$59,400Dr $59,400Cr ( $660,000 x .09)

$52,280Cr $52,280Dr

Amortz of PSC $17,000Dr $17,000Cr

55,000Cr 55,000Dr

Benefits paid 40,000Cr 40,000Dr

$100,000Dr $100,000CrFrom PSC amendment

$82,120Dr $55K Cr $110,120Cr $83,000Dr $737,400Cr $613,480Dr

Items

DrPensionExpense

CrPension Asset-Liab

CrCash

PBO Plan Assets

Beg Bal at 1/1/11

Service Cost

Interest Cost

Actual Return

Contributions

Cr Dr

$13,800Cr $560,000Cr $546,200Dr

DrOCI-PSC

58,000Dr 58,000Cr

$59,400Dr $59,400Cr ( $660,000 x .09)

$52,280Cr $52,280Dr

Amortz of PSC $17,000Dr $17,000Cr

55,000Cr 55,000Dr

Benefits paid 40,000Cr 40,000Dr

$100,000Dr $100,000CrFrom PSC amendment

$82,120Dr $55K Cr $110,120Cr $83,000Dr $737,400Cr $613,480Dr

RECONCILIATION

PBO....... $737,400

-

PlanAssets $613,480-----------------------PensionLiability $123,920

$123,920

Exercise 20-8

Dougherty Corp. has beg-of-year PVs for its PBO and MRVPA.

PBO MRVPA2009 $2,000,000 $1,900,0002010 2,400,000 2,500,0002011 2,900,000 2,600,0002012 3,600,000 3,000,000

The average remaining service life per employee in 09 and 10 is10 years and in 11 and 12 is 12 years.

The net gain or loss that occurred during each year is as follows:2009, $280,000 loss;2010 $90,000 loss2011 $10,000 loss2012 $25,000 gain(In working the solution the gains and losses must be aggregatedto arrive at year-end balances).

Using the corridor approach, compute the amount of net gain or lossamortized and charged to pension expense in each of the four years,setting up an appropriate schedule.

OCIGains and Losses

UnexpectedGains and Losses

UnexpectedGains and Losses

LiabilityGains and Losses

Actuary PBO not equal to Book PBO

Actual RPA not equalto expected RPA

Actual RPA not equalto expected RPA

What is the corridor in 2009?

Beg PBO $2,000,000 x .10 = $200,000vsBeg MRVPA $1,900,000 x .10 = $190,000

How much OCI loss gets over the corridor in 2009?

NONE!Because there was no balance at 1/1/09

* The $280,000 loss was incurred DURING 2009.

What is the corridor in 2010?

Beg PBO $2,400,000 x .10 = $240,000vsBeg MRVPA $2,500,000 x .10 = $250,000

How much OCI loss gets over the corridor in 2010?

$280,000 - $250,000 = $30,000/10 = $3,000

How much OCI loss gets over the corridor in 2010?

$280,000 - $250,000 = $30,000/10 = $3,000

How much of the 1/1/10 OCI loss is still left?

$280,000 - $3,000 = $277,000

So what’s the balance at 1/1/11 of OCI gain/loss?

$277,000(from 09) + $90,000(during 10) = $367,000

What is the corridor in 2011?

Beg PBO $2,900,000 x .10 = $290,000vsBeg MRVPA $2,600,000 x .10 = $260,000

How much OCI loss gets over the corridor in 2011?

$367,000 – 290,000 = $77,000 / 12 = $6,417

How much unrecognized loss gets over the corridor in 2011?

$367,000 – 290,000 = $77,000 / 12 = $6,417

How much of the 1/1/11 unrecognized loss is still left?

$367,000 - 6,417 = $360,583

So what’s the balance at 1/1/12 of unrecognized gain/loss?

$360,583 + $10,000 = $370,583

What is the corridor in 2012?

Beg PBO $3,600,000 x .10 = $360,000vsBeg MRVPA $3,000,000 x .10 = $300,000

How much unrecognized loss gets over the corridor in 2012?

$370,583 - $360,000 = $10,583/12 = $882

How much of the 1/1/12 unrecognized loss is still left?

$370,583 - 882 = $369,701

So what’s the balance at 1/1/13 of unrecognized gain/loss?

$369,701 - $25,000 gain = $344,701 UNRECOGNIZED LOSS

Mildred Enterprises provides the following information relative to its definedbenefit pension plan:

Balances or Values at 12/31/11

Projected Benefit Obligation................... $2,737,000Accumulated Benefit Obligation.......... 1,980,000Fair value of plan assets... 2,278,329AOCI (PSC) 205,000AOCI (G/L) (1/1/11 bal, -0-_ 45,680Pension liability 207,991Other pension plan data: Service cost for 2011 $ 94,000 Unrecognized prior service cost amtz for 2011 45,000 Actual return on plan assets in 2011 130,000 Expected return on plan assets in 2011 175,680 Interest on January 1, 2011 PBO 253,000 Contributions to plan in 2011 92,329 Benefits paid.... 140,000

A. Prepare the NOTE disclosing the components of pension expensefor year 2011.

ervice Cost

nterest Cost

eturn on Plan Assets

rior Service Cost

ain

r

oss

$94,000 (given)

$253,000 (given)

$175,680

$45,000 (given) amortization for 2011

NO unrecognized loss adjustment here becausebeginning balance was zero.

PENSION EXPENSE.. $216,320$216,320

MUST show expected!

B. Determine the amounts of other comprehensive income andcomprehensive income for 2011. Net income for 2011 is $35,000.

OTHER COMPREHENSIVE INCOME

Amortization of PSC................ ($45,000)

* The amtz of PSC into pension expensemakes comprehensive income INCREASE(its like its not in fake NI anymore, its in real NI).

Actuarial Loss......................... $45,680

OTHER COMPREHENSIVE LOSS.......... $680

B. Determine the amounts of other comprehensive income andcomprehensive income for 2011. Net income for 2011 is $35,000.

COMPREHENSIVE INCOME FOR 2011

Real Net income.............................. $35,000

-OCI Loss......................................... $680-----------------------------------------------------

COMPREHENSIVE INCOME.......... $34,320

c. Compute the amount of AOCI reported at 12/31/11

Beginning AOCI 1/1/11 PSC G/L

Beginning Balance......................... $250,000(205K bal given + 45K which was amtzthis year)

$0

Amortization of PSC. ($45,000) --

Liability Loss (45,680)

Ending balance 12/31/11 $205,000 Dr $45,680 Dr