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P20-9

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 1172

Short Answer

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2017. Projected benefit obligation $4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of $600,000 are created. Other data related to the pension plan are: 2017 2018 Service cost $150,000 $170,000 Prior service cost amortization –0– 90,000 Contributions (funding) to the plan 200,000 184,658 Benefits paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2017. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2017. (c) Prepare a pension worksheet for 2018 and any journal entries related to the pension plan as of December 31, 2018. (d) Indicate the pension-related amounts reported in the 2018 financial statements.

A pension agreement is a contract between the organization and its employees, which states the amount credited to the employee's provident fund. The money collected can be used after retirement.

See the step by step solution

Step by Step Solution

Step 1: (a) Preparation of the pension worksheet for 2017.

Hobbs Co.
Pension Worksheet for the year 2017
General journal entriesMemo Record

Particulars

Annual pension expense

Cash

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$4,600,000 Cr.

$4,600,000 Dr.

Service cost

$150,000 Dr.

$150,000 Cr.

Interest cost

$460,000 Dr.

$460,000 Cr.

Actual return

$252,000 Cr.

$252,000 Dr.

Unexpected loss

$24,000 Cr.

$24,000 Dr.

Contributions

$200,000 Cr.

$200,000 Dr.

Benefits

$220,000 Dr.

$220,000 Cr.

Journal entry for 2017

$334,000 Dr.

$200,000 Cr.

$24,000 Dr.

$158,000 Cr.

Accumulated OCI Dec 31, 2017

0

Balance Dec 31, 2017

$24,000 Dr.

$158,000 Cr.

$4,990,000 Cr.

$4,832,000 Dr.

Step 2: (b) Journal entry to record the pension expense for 2017.

Hobbs Co.
Journal Entry

Date

Particulars

Debit

Credit

2017

Other comprehensive income (gain/loss)

$24,000

Pension expense

$334,000

Cash

$200,000

Pension asset/liability

$158,000

(To record the pension expense)

Step 3: (c) Preparation of pension worksheet and the journal entry for 2018.

Hobbs Co.
Pension Worksheet for the year 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

Additional PSC Jan 1,2018

$600,000 Dr

$600,000 Cr

Balance Jan 1, 2018

.

$5,590,000 Cr.

Service cost

$170,000 Dr.

$170,000 Cr.

Interest cost

$559,000 Dr.

$559,000 Cr.

Actual return

$350,000 Cr.

$350,000 Dr.

Unexpected loss

$36,560 Cr.

$36,560 Dr.

Amortization of PSC

$90,000 Cr.

Contributions

$184,658 Cr.

$184,658 Dr.

Benefits

$280,000 Dr.

$280,000 Cr.

Journal entry for 2018

$432,440 Dr.

$184,658 Cr.

$510,000 Dr.

$36,560 Dr.

$794,342 Cr.

Accumulated OCI Dec 31, 2017

0

$24,000 Dr.

Balance Dec 31, 2018

$510,000 Dr.

$60,560 Dr.

$952,342 Cr.

$6,039,000Cr.

$5,086,658 Dr.

Hobbs Co.
Journal Entry

Date

Particulars

Debit

Credit

2018

Other comprehensive income (gain/loss)

$36,560

Other comprehensive income (PSC)

$510,000

Pension expense

$432,440

Cash

$184,658

Pension asset/liability

$794,342

(To record the pension expense)

Step 4: (d) Preparation of financial statements to indicate the amount.

Hobbs Co.
Income Statement

Particulars

Amount

Pension expense

$432,440

Hobbs Co.
Balance sheet

Liabilities

Amount

Pension liability

$952,342

Stockholder’s Equity

Accumulated other comprehensive loss (PSC)

$510,000

Accumulated other comprehensive loss (Gain/Loss)

$60,560

Most popular questions for Business-studies Textbooks

Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year’s financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows. Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefi ts expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation’s comparative income statement was $72,000 in 2017 and $57,680 in 2016. The following are selected figures from the plan’s funded status and amounts recognized in the Davis Corporation’s Statement of Financial Position at December 31, 2017 ($000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefi ts of $636) $ (870) Projected benefi t obligation $(1,200) Plan assets at fair value 1,050 Projected benefi t obligation in excess of plan assets $ (150) Given that Davis Corporation’s work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. Instructions (a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements. (b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation. (c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise. (2) Briefly describe how pension gains and losses are recognized.

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