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P20-5

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Intermediate Accounting (Kieso)
Found in: Page 1170

Short Answer

Hiatt Toothpaste Company initiates a defined benefit pension plan for its 50 employees on January 1, 2017. The insurance company which administers the pension plan provided the following selected information for the years 2017, 2018, and 2019

For Year Ended December 31, 2017 2018 2019 Plan assets (fair value) $50,000 $ 85,000 $180,000 Accumulated benefi t obligation 45,000 165,000 292,000 Projected benefi t obligation 60,000 200,000 324,000 Net (gain) loss (for purposes of corridor calculation) –0– 78,400 81,033 Employer’s funding contribution (made at end of year) 50,000 60,000 105,000

There were no balances as of January 1, 2017, when the plan was initiated. The actual and expected return on plan assets was 10% over the 3-year period, but the settlement rate used to discount the company’s pension obligation was 13% in 2017, 11% in 2018, and 8% in 2019. The service cost component of net periodic pension expense amounted to the following: 2017, $60,000; 2018, $85,000; and 2019, $119,000. The average remaining service life per employee is 12 years. No benefits were paid in 2017, $30,000 of benefits were paid in 2018, and $18,500 of benefits were paid in 2019 (all benefits paid at end of year). Instructions (Round to the nearest dollar.) (a) Calculate the amount of net periodic pension expense that the company would recognize in 2017, 2018, and 2019. (b) Prepare the journal entries to record net periodic pension expense, employer’s funding contribution, and related pension amounts for the years 2017, 2018, and 2019

Employer funding contribution is a term used when the employer contributes a certain percentage of money towards the provident fund for an employee. This money will be utilized after the employee's retirement.

See the step by step solution

Step by Step Solution

Step 1: (a) Computation of the amount of net periodic pension expense that the company would recognize in 2017, 2018, and 2019

Particulars

2017

2018

2019

Service cost

$60,000

$85,000

$119,000

Add: Interest on PBO

-

$6,600

$16,000

Less: Expected return on plan assets

-

$5,000

$8,500

Amortization of the gain or loss

-

0

$4,867

Amortization of prior service cost

-

0

0

Pension Expense

$60,000

$86,600

$131,367

Step 2: (b) Preparation of the journal entries to record net periodic pension expense, employer’s funding contribution, and related pension amounts for the years 2017, 2018, and 2019

Hiatt Toothpaste Company
Journal Entry

Date

Particulars

Debit

Credit

2017

Pension Expense

$60,000

Cash

$50,000

Pension asset/liability

$10,000

(To record the pension expense)

2018

Pension Expense

$86,600

Other comprehensive income (Gain/Loss)

$78,400

Cash

$60,000

Pension asset/liability

$105,000

(To record the pension expense)

2019

Pension Expense

$131,367

Other comprehensive income (Gain/Loss)

$2.633

Cash

$105,000

Pension asset/liability

$29,000

(To record the pension expense)

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