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P20-8

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Intermediate Accounting (Kieso)
Found in: Page 1172

Short Answer

Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2017 and 2018. 2017 2018 Projected benefi t obligation, January 1 $600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 $ 59,000 Settlement rate 10% 10% Expected rate of return 10% 10% Actual return on plan assets 36,000 61,000 Amortization of prior service cost 70,000 50,000 Annual contributions 97,000 81,000 Benefits paid retirees 31,500 54,000 Increase in projected benefi t obligation due to changes in actuarial assumptions 87,000 –0– Accumulated benefi t obligation at December 31 721,800 789,000 Average service life of all employees 20 years Vested benefi t obligation at December 31 464,000 Instructions (a) Prepare a pension worksheet presenting both years 2017 and 2018 and accompanying computations and amortization of the loss (2018) using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) For 2018, indicate the pension amounts reported in the financial statements.

Plan assets are those organizations' assets or financial investments maintained to provide pension benefits to their employees. It is prescribed under the pension worksheet to compute the amount of pension expense.

See the step by step solution

Step by Step Solution

Step 1: Working notes: Computation of unexpected loss or gain and amortization of gain/loss for 2017 and 2018.

Step 2: (a) Preparation of pension worksheet for the years 2017 and 2018.

Lemke Company
Pension Worksheet for the years 2017 and 2018
General journal entriesMemo Record

Particulars

Annual pension expense

Cash

OCI-Prior service cost

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$190,000 Cr.

$600,000 Cr.

$410,000 Dr.

Service cost

$40,000 Dr.

$40,000 Cr.

Interest cost

$60,000 Dr.

$60,000 Cr.

Actual return

$36,000 Cr.

$36,000 Dr.

Unexpected loss

$5,000 Cr.

$5,000 Dr.

Amortization of PSC

$70,000 Dr.

$70,000 Cr.

Contributions

$97,000 Cr.

$97,000 Dr.

Benefits

$31,500 Dr.

$31,500 Cr.

Increase in PBO

$87,000 Dr.

$87,000 Cr.

Journal entry for 2017

$129,000 Dr.

$97,000 Cr.

$70,000 Cr.

$92,000 Dr.

$54,000 Cr.

Accumulated OCI Dec 31, 2017

$160,000 Dr.

0

Balance Dec 31, 2017

$90,000 Dr.

$92,000 Dr.

$244,000 Cr.

$755,500 Cr.

$511,500 Dr.

Service cost

$59,000 Dr.

$59,000 Cr.

Interest cost

$75,550 Dr.

$75,550 Cr.

Actual return

$61,000 Cr.

$61,000 Dr.

Unexpected gain

$9,850 Dr.

$9,850 Cr.

Amortization of PSC

$50,000 Dr.

$50,000 Cr.

Amortization of loss

$823 Dr.

$823 Cr.

Contributions

$81,000 Cr.

$81,000 Dr.

Benefits

$54,000 Dr.

$54,000 Cr.

Journal entry for 2018

$134,223 Dr.

$81,000 Cr.

$50,000 Cr.

$10,673 Cr.

$7,450 Dr.

Accumulated OCI Dec 31, 2017

$90,000 Dr.

$92,000 Dr.

Balance Dec 31, 2018

$40,000 Dr.

$81,327 Dr.

$236,550 Cr.

$836,050 Cr.

$599,500 Dr.

Step 3: (b) Journal entry to record the pension expense for the years 2017 and 2018

Lemke Company
Journal Entry

Date

Particulars

Debit

Credit

2017

Pension expense

$129,000

Other comprehensive income (gain/loss)

$92,000

Cash

$97,000

Pension asset/liability

$54,000

Other comprehensive income (PSC)

$70,000

(To record the pension expense)

2018

Pension asset/liability

$7,450

Pension expense

$134,223

Cash

$81,000

Other comprehensive income (PSC)

$50,000

Other comprehensive income (gain/loss)

$10,673

(To record the pension expense)

Step 4: (c) Indication of the amounts in the financial statements.

Lemke Company
Income Statement

Particulars

Amount

Pension expense

$134,223

Lemke Company
Comparative income statement

Particulars

Amount

Net Income

-

Other comprehensive loss

Asset gain

$9,850

Amortization of loss

$823

Prior service cost amortization

$50,000

$60,673

Comprehensive Income

-

Lemke Company
Balance sheet

Liabilities

Amount

Pension liability

$236,550

Stockholder’s Equity

Accumulated other comprehensive loss (PSC)

$40,000

Accumulated other comprehensive loss (Gain/Loss)

$481,327

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