Concept explainers
1.
Compute the amount of pension expense of Company P for 2016 and 2017.
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.
Compute the amount of pension expense of Company P for 2016 and 2017 as follows:
Particulars | 2016 | 2017 |
Service cost | $340,000 | $348,000 |
Add: Interest cost on projected benefit obligation | $218,000 (1) |
$273,800 (2) |
Less: Expected return on plan assets | $0 | ($60,300) (4) |
Add: Amortization of prior service cost | $136,250(3) | $136,250 |
Pension expense | $694,250 | $697,750 |
Table (1)
Working note (1):
Calculate the interest cost on projected benefit obligation for 2016:
Working note (2):
Calculate the interest cost on projected benefit obligation for 2017:
Working note (3):
Calculate the amortization of prior service cost for 2016.
Working note (4):
Calculate the expected return on plant assets.
2.
Prepare necessary journal entries of Company P for 2016 and 2017.
2.
Explanation of Solution
Prepare
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
January 1, 2016 | Other comprehensive income: Prior service cost | 2,180,000 | ||
Accrued/prepaid pension cost | 2,180,000 | |||
(To record the beginning liability for prior service cost for 2016) |
Table (2)
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the other comprehensive income: Prior service cost account with $2,180,000.
- Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $2,180,000.
Prepare journal entry to record the pension expense for 2016:
In this case, Company P has underfunded the pension contribution by $24,250
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2016 | Pension expense | 694,250 | ||
Cash | 670,000 | |||
Accrued/prepaid pension cost | 24,250 | |||
(To record the underfunded pension expense of $24,250) |
Table (3)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $694,250.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $670,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $24,250.
Prepare journal entry to record the amortized prior service cost for 2016:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2016 | Accrued/prepaid pension cost | 136,250 | ||
Other comprehensive income: Prior service cost | 136,250 | |||
(To record the amortization of prior service cost) |
Table (4)
- Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $136,250.
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $136,250.
Prepare journal entry to record the pension expense for 2017:
In this case, Company P has overfunded the pension contribution by $2,250
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2017 | Pension expense | 697,750 | ||
Accrued/prepaid pension cost | 2,250 | |||
Cash | 700,000 | |||
(To record the pension expense and its overfunded by $2,250) |
Table (5)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $697,750.
- Accrued/prepaid pension cost is asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $2,250.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $700,000.
Prepare journal entry to record the amortized prior service cost for 2017:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2017 | Accrued/prepaid pension cost | 136,250 | ||
Other comprehensive income: Prior service cost | 136,250 | |||
(To record the amortization of prior service cost) |
Table (6)
- Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $136,250.
- Other comprehensive income: Prior service cost is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the other comprehensive income: Prior service cost account with $136,250.
3.
Calculate the total accrued/prepaid pension cost at the end of 2017, and identify whether it is considered as an asset or a liability.
3.
Explanation of Solution
Calculate the total accrued/prepaid pension cost as the end of 2017, and identify whether it is considered as an asset or a liability as follows:
Accrued/prepaid pension cost | |||
December 31, 2016 | $136,250 | January 1, 2016 | $2,180,000 |
December 31, 2017 | $136,250 | December 31, 2016 | $24,250 |
December 31, 2017 | $2,250 | ||
Total | $274,750 | Total | 2,204,250 |
Clos. Bal. | $1,929,500 |
In this case, the total accrued/prepaid pension cost at the end of 2017 shows the credit balance, hence it is considered as the accrued pension cost liability ($1,929,500).
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