Question: Bill Haley is learning about pension accounting. He is convinced that in years when companies record liability gains and losses, total comprehensive income will not be affected. Is Bill correct? Explain.
According to the stated situation, the assumption of Bill is not correct.
Comprehensive income refers to the variations arising in an accounting period and includes the changes in the equity of the company except for investments made by owners in terms of the liquid form of assets and distributions to them in terms of dividends.
The assumption of Bill is incorrect.
In the accounting process, the companies record liability gains and losses in the total comprehensive income. Also, the total comprehensive income is affected by the recording of liability gains and losses linked with pension plans because the gains and losses on pension plan assets are not realized until a future period.
Linda Berstler Company sponsors a defined benefit pension plan. The corporation’s actuary provides the following information about the plan.
January 1, 2017 December 31, 2017
Defined benefit obligations $2,500 $3,300
Plan assets (fair value) 1,700 2,620
Discount rate 10%
Pension asset/liability 800 ?
Service cost for the year 2017 400
Contributions (funding in 2017) 700
Benefits paid in 2017 200
(a) Compute the actual return on the plan assets in 2017.
(b) Compute the amount of other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1, 2017, balance was zero.)
Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2017 and 2018. 2016 2017 2018 Annual service cost $16,000 $ 19,000 $ 26,000 Settlement rate and expected rate of return 10% 10% 10% Actual return on plan assets 18,000 22,000 24,000 Annual funding (contributions) 16,000 40,000 48,000 Benefits paid 14,000 16,400 21,000 Prior service cost (plan amended, 1/1/17) 160,000 Amortization of prior service cost 54,400 41,600 Change in actuarial assumptions establishes a December 31, 2018, projected benefi t obligation of: 520,000 2017 2018 Plan assets (fair value), December 31 $699,000 $849,000 Projected benefi t obligation, January 1 700,000 800,000 Pension asset/liability, January 1 140,000 Cr. ? Prior service cost, January 1 250,000 240,000 Service cost 60,000 90,000 Actual and expected return on plan assets 24,000 30,000 Amortization of prior service cost 10,000 12,000 Contributions (funding) 115,000 120,000 Accumulated benefi t obligation, December 31 500,000 550,000 Interest/settlement rate 9% 9% Instructions (a) Compute pension expense for 2017 and 2018. (b) Prepare the journal entries to record the pension expense and the company’s funding of the pension plan for both years.
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