Identify the five components that comprise pension expense. Briefly explain the nature of each component.
The pension expense of an organization strictly depends upon its five components. These components are equally responsible for the overall enhancement of the projected defined benefit pension plan.
1. Service cost: Service cost measures the present value of pension benefits by using the pension benefit formula for the total number of years of service of an employee during the period of an accounting year.
2. Interest cost: It is calculated by multiplying the amount of projected benefit obligation with its settlement rate that measures the increase in the defined benefit obligation pension plan.
3. Actual return on plan assets: It measures the inevitable decrease in the pension cost for the investment made by an organization towards the pension plans. It is responsible for measuring the variation in the amount of plan value of assets.
4. Amortization of past services: It is a term used to measure the cost of benefits (retroactive) that are acceptable in the pension plan amendment of the organization.
5. Gains and losses: It measures the variation in the amount of defined benefit obligation and the plan assets of the organization. It arises due to the difference in the actual and the expected value of plan assets according to the actuarial assumptions.
The accounting staff of Usher Inc. has prepared the following pension worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2017.
Instructions (a) Determine the missing amounts in the 2017 pension worksheet, indicating whether the amounts are debits or credits. (b) Prepare the journal entry to record 2017 pension expense for Usher Inc. (c) The accounting staff has heard of a pension accounting procedure called “corridor amortization.” Is Usher required to record any amounts for corridor amortization in (1) 2017? In (2) 2018? Explain.
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.)
Andrews Company has five employees participating in its defined benefit pension plan. Expected years of future service for these employees at the beginning of 2017 are as follows. Future Employee Years of Service Jim 3 Paul 4 Nancy 5 Dave 6 Kathy 6 On January 1, 2017, the company amended its pension plan, increasing its projected benefit obligation by $72,000. Instructions Compute the amount of prior service cost amortization for the years 2017 through 2022 using the years-of-service method, setting up appropriate schedules.
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