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 | ||||||
2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 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) |
2019 | $1,200,000 | 6/24 | $300,000 | $900,000 |
2020 | $1,200,000 | 5/24 | $250,000 | $650,000 |
2021 | $1,200,000 | 5/24 | $250,000 | $400,000 |
2022 | $1,200,000 | 4/24 | $200,000 | $200,000 |
2023 | $1,200,000 | 3/24 | $150,000 | $50,000 |
2024 | $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 |
2019 | $1,200,000 | $300,000 | $900,000 |
2020 | $900,000 | $250,000 | $650,000 |
2021 | $650,000 | $250,000 | $400,000 |
2022 | $400,000 | $200,000 | $200,000 |
2023 | $200,000 | $150,000 | $50,000 |
2024 | $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 2019 and 2020.
2.
Explanation of Solution
Prepare
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
January 1, 2019 | 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 2019) |
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 2019:
In this case, Company B has underfunded the pension contribution by $27,000
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2019 | 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 $27,000.
Prepare journal entry to record the amortized prior service cost for 2019:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2019 | 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 2020:
In this case, Company B has underfunded the pension contribution by $1,930
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31,2020 | 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 $1,930.
Prepare journal entry to record the amortized prior service cost for 2020:
Date | Accounts Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2020 | 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 2019 and 2020:
Particulars | 2019 | 2020 |
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)
Want to see more full solutions like this?
Chapter 19 Solutions
Intermediate Accounting: Reporting And Analysis
- Jay Company has had a defined benefit pension plan for several years. At the beginning of 2019, Jay amended the plan; this amendment provided for increased benefits to employees based on services rendered in prior periods. The prior service cost related to this amendment totaled $88,000. As a result, the projected benefit obligation increased. Jay decided not to fund the increased obligation at the time of the amendment, but rather to increase its periodic year-end contributions to the pension plan. The following information for 2019 has been provided by Jay’s actuary and funding agency and obtained from a review of its accounting records: Projected benefit obligation (12/31) $808,090 Service cost 183,000 Discount rate 9% Cumulative net loss (1/1) 64,500 Company contribution to pension plan (12/31) 200,000 Projected benefit obligation (1/1)* 513,000 Plan assets, fair value (12/31) 698,000 Accrued pension cost (liability) (1/1) 33,000* Expected (and actual) return…arrow_forwardarasota Company has five employees participating in its defined benefit pension plan. Expected years of future service for these employees at the beginning of 2020 are as follows. Employee Future Years of Service Jim 3 Paul 4 Nancy 5 Dave 6 Kathy 6 On January 1, 2020, the company amended its pension plan, increasing its projected benefit obligation by $74,880.Compute the amount of prior service cost amortization for the years 2020 through 2025 using the years-of-service method, setting up appropriate schedules. Year Annual Amortization 2020 $enter a dollar amount 2021 enter a dollar amount 2022 enter a dollar amount 2023 enter a dollar amount 2024 enter a dollar amount 2025 enter a dollar amountarrow_forwardSunland Company sponsors a defined benefit plan for its 100 employees. On January 1, 2025, the company's actuary provided the following information. Accumulated other comprehensive loss (PSC) Pension plan assets (fair value and market-related asset value) Accumulated benefit obligation Projected benefit obligation $149,800 198,700 259,500 387,200 The average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2025, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to $49,100; the projected benefit obligation was $486,600; fair value of pension assets was $275,600; the accumulated benefit obligation amounted to $362,700. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is $10,300. The company's current year's…arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningIndividual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT