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P20-6

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Intermediate Accounting (Kieso)
Found in: Page 1171

Short Answer

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to $5,000,000 and the fair value of pension plan assets was $3,000,000. The market-related asset value was also $3,000,000. Unrecognized prior service cost was $2,000,000. On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were $4,850,000 and $4,025,000, respectively. The fair value of the pension plan assets amounted to $4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2017 amounted to $200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2017. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2017, 2018, and 2019.

(b) Compute pension expense for the year 2017.

(c) Compute the amount of the 2017 increase/decrease in net gains or losses and the amount to be amortized in 2017 and 2018.

(d) Prepare the journal entries required to report the accounting for the company’s pension plan for 2017

Components of pension expense are those variables responsible for the overall computation of the total pension expense an organization bears in an accounting year.

See the step by step solution

Step by Step Solution

Step 1: (a) Preparation of a schedule, based on the average remaining life per employee to amortize the component of pension expense for the years 2017, 2018, and 2019

Use the formula below to ascertain the amount of prior service cost amortization

Year

Calculation

Amount

2017

$166,667

2018

$166,667

2019

$166,667

Step 2: (b) Computation of the pension expense for the year 2017

Particulars

Amount

Service cost

$200,000

Add: Interest on PBO

$500,000

Less: Actual return on plan assets

$325,000

Add: Unexpected gain

$25,000

Amortization of prior service cost

$166,667

Pension Expense

$566,667

Step 3: (c) Computation of the net gain or loss for the years 2017 and 2018

Particulars

Amount

Fair value of plan assets Dec 31, 2017

$4,100,000

Less: Expected fair value of plan assets Jan 1, 2017

$3,000,000

Add: Interest

$300,000

Add: Contribution

$775,000

$4,075,000

Asset gain

$25,000 Dr.

Actuarially computed PBO Dec 31, 2017

$4,850,000

Less: PBO Jan 1, 2017

$5,000,000

Add: Interest cost

$500,000

Add: Service cost

$200,000

$5,700,000

Liability loss

$850,000

Net gain at Dec 31, 2017

$875,000

Step 4: (d) Preparation of the journal entries required to report the accounting for the company’s pension plan for 2017

Aykroyd Inc.
Journal Entry

Date

Particulars

Debit

Credit

2017

Pension Expense

$566,667

Pension asset/liability

$1,250,000

Other comprehensive income (Gain/Loss)

$875,000

Other comprehensive Income (PSC)

$166,667

Cash

$775,000

(To record the pension expense)

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