Concept explainers
1.
Calculate the average remaining service life of Company T for 2019.
1.
Explanation of Solution
Pension plan: Pension plan is the plan devised by corporations to pay the employees an income after their retirement, in the form of pension.
Calculate the average remaining service life of Company T for 2019 as follows:
Working note (1):
Calculate the total service years rendered.
Employee numbers | Expected years of future service | Service years rendered |
1-5 | 3 | 15 |
6-10 | 6 | 30 |
11-15 | 9 | 45 |
16-20 | 12 | 60 |
21-25 | 15 | 75 |
26-30 | 18 | 90 |
31-35 | 21 | 105 |
36-40 | 24 | 120 |
Total service years rendered | 540 |
Table (1)
2.
Prepare a schedule to calculate the net gain or loss component of pension expense of Company T during 2019 and 2020.
2.
Explanation of Solution
Prepare a schedule to calculate the net gain or loss component of pension expense of Company T during 2019 and 2020 as follows:
Year |
Cumulative net loss (gain) (A) |
Corridor (B) |
Excess net loss (gain) | Amortized net loss (gain) |
2019 | $29,000 | $47,000 (2) | - | - |
2020 | $29,000 | $68,600 (3) | - | - |
Table (2)
Working note (2):
Calculate the amount of corridor for 2019.
Working note (3):
Calculate the amount of corridor for 2020.
Note: The projected benefit obligation of both 2019 and 2020 is more than the fair value of plan asset. Hence, the amount of corridor is calculated from 10% of the projected benefit obligation.
The cumulative net loss of 2019 and 2020 does not exceed corridor, therefore no amortized net loss incurred during 2019 and 2020.
3.
Prepare a schedule to calculate the pension expense of Company T for 2019 and 2020.
3.
Explanation of Solution
Prepare a schedule to calculate the pension expense of Company T for 2019 and 2020 as follows:
Particulars | Amount in ($) | Amount in ($) |
Service cost | 169,000 | 175,000 |
Add: Interest cost on projected benefit obligation | 47,000 (4) | 68,600 (5) |
Less: Expected return on plan assets | (40,500) | (62,050) |
Pension expenses | $175,500 | $181,550 |
Table (3)
Working note (4):
Calculate the interest cost on projected benefit obligation for 2019:
Working note (5):
Calculate the interest cost on projected benefit obligation for 2020:
4.
Prepare necessary journal entries of Company T for 2019 and 2020.
4.
Explanation of Solution
Prepare
In this case, Company T has underfunded the pension contribution by $500
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2019 | Pension expense | 175,500 | ||
Cash | 175,000 | |||
Accrued/prepaid pension cost | 500 | |||
(To record the underfunded pension expense of $500) |
Table (4)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $175,500.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $175,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $500.
Note: For accrued/prepaid pension cost no other adjustment is required. Because there are no amortization of the cumulative net loss, and the balance of $65,500
Prepare journal entry to record the pension expense for 2020:
In this case, Company T has underfunded the pension contribution by $3,550
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2020 | Pension expense | 181,550 | ||
Cash | 178,000 | |||
Accrued/prepaid pension cost | 3,550 | |||
(To record the underfunded pension expense of $3,550) |
Table (5)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $181,550.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $178,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $3,550.
5.
Calculate the total accrued/prepaid pension cost of Company T at the end of the 2019, and explain whether it is considered as an asset or a liability.
5.
Explanation of Solution
Calculate the total accrued/prepaid pension cost of Company T at the end of the 2019, and explain whether it is considered as an asset or a liability as follows:
Accrued/prepaid pension cost | |||
Beg. Bal. | $65,000 | ||
December 31, 2019 | $500 | ||
Total | $65,500 | ||
Clos. Bal. | $65,500 |
In this case, the accrued/prepaid pension cost account at the end of 2019 shows a credit balance, hence it is considered as the accrued pension cost liability ($65,500).
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