1.
Prepare a set of schedules to calculate (a) the amortization fraction for each year and (b) the amortization of the prior service cost of company B.
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.
(a) Prepare a schedule to calculate the amortization fraction for each year as follows:
Employee | Expected years of future service | Number of service years rendered in each year | ||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total | ||
A | 1 | 1 | ||||||
B | 3 | 1 | 1 | 1 | ||||
C | 4 | 1 | 1 | 1 | 1 | |||
D | 5 | 1 | 1 | 1 | 1 | 1 | ||
E | 5 | 1 | 1 | 1 | 1 | 1 | ||
F | 6 | 1 | 1 | 1 | 1 | 1 | 1 | |
Total | 6 | 5 | 5 | 4 | 3 | 1 | 24 | |
Amortization fraction | 6/24 | 5/24 | 5/24 | 4/24 | 3/24 | 1/24 |
Table (1)
(b) Prepare a schedule to calculate the amortization of the prior service cost as follows:
Year | Total prior service cost (A) |
Amortization fraction (B) | Amortization to increase pension expense |
Remaining prior service cost (1) |
2016 | $1,200,000 | 6/24 | $300,000 | $900,000 |
2017 | $1,200,000 | 5/24 | $250,000 | $650,000 |
2018 | $1,200,000 | 5/24 | $250,000 | $400,000 |
2019 | $1,200,000 | 4/24 | $200,000 | $200,000 |
2020 | $1,200,000 | 3/24 | $150,000 | $50,000 |
2021 | $1,200,000 | 1/24 | $50,000 | $ 0 |
Table (2)
Working note (1):
Calculate the reaming prior service cost.
Year | Beginning prior service cost (D) | Amortization to increase pension expense (E) |
Remaining prior service cost |
2016 | $1,200,000 | $300,000 | $900,000 |
2017 | $900,000 | $250,000 | $650,000 |
2018 | $650,000 | $250,000 | $400,000 |
2019 | $400,000 | $200,000 | $200,000 |
2020 | $200,000 | $150,000 | $50,000 |
2021 | $50,000 | $50,000 | $ 0 |
Table (3)
Note: The remaining service cost for the previous year is considered as the beginning prior service cost for the current year.
2.
Prepare necessary journal entries of Company B 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 | 1,200,000 | ||
Accrued/prepaid pension cost | 1,200,000 | |||
(To record the beginning liability for prior service cost for 2016) |
Table (4)
- 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 $1,200,000.
- Accrued/prepaid pension cost is a liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,200,000.
Prepare journal entry to record the pension expense for 2016:
In this case, Company B has underfunded the pension contribution by $27,000
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2016 | Pension expense (2) | 877,000 | ||
Cash | 850,000 | |||
Accrued/prepaid pension cost | 27,000 | |||
(To record the underfunded pension expense of $27,000) |
Table (5)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $877,000.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $850,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $27,000.
Prepare journal entry to record the amortized prior service cost for 2016:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2016 | Accrued/prepaid pension cost | 300,000 | ||
Other comprehensive income: Prior service cost | 300,000 | |||
(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 $300,000.
- 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 $300,000.
Prepare journal entry to record the pension expense for 2017:
In this case, Company B has underfunded the pension contribution by $1,930
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2017 | Pension expense (2) | 831,930 | ||
Cash | 830,000 | |||
Accrued/prepaid pension cost | 1,930 | |||
(To record the underfunded pension expense of $1,930) |
Table (7)
- Pension expense is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the pension expense with $831,930.
- Cash is an asset account and it is decreased. Therefore, credit the cash account with $830,000.
- Accrued/prepaid pension cost is liability account and it is increased. Therefore, credit the accrued/prepaid pension cost account with $1,930.
Prepare journal entry to record the amortized prior service cost for 2017:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2017 | Accrued/prepaid pension cost | 250,000 | ||
Other comprehensive income: Prior service cost | 250,000 | |||
(To record the amortization of prior service cost) |
Table (8)
- Accrued/prepaid pension cost is an asset account and it is increased. Therefore, debit the accrued/prepaid pension cost account with $92,000.
- 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 $92,000.
Working note (2):
Compute the pension expense for 2016 and 2017:
Particulars | 2016 | 2017 |
Service cost | 469,000 | 507,000 |
Add: Interest cost on projected benefit obligation | 108,000 | 159,930 |
Less: Expected return on plan assets | $0 | ($85,000) |
Add: Amortization of prior service cost | $300,000 (1) | $250,000 (1) |
Pension expense | $877,000 | $831,930 |
Table (9)
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Chapter 19 Solutions
Intermediate Accounting: Reporting and Analysis (Looseleaf)
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