20
Accounting CHAPTER for Pensions and Postretirement Benefits
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics 1. Basic definitions and concepts related to pension plans. 2. Worksheet preparation. 3. Income statement recognition, computation of pension expense. 9, 10, 11, 13, 16, 17 Brief Questions Exercises Exercises 1, 2, 3, 4, 5, 6, 7, 8, 9, 12, 24, 30 3 1, 2, 4 16 Problems Concepts for Analysis 1, 2, 3, 4, 5, 7
3, 4, 7, 10, 14, 15, 18 1, 2, 3, 6, 11, 13, 14, 15, 16, 17, 18
1, 2, 4, 7, 8, 9, 10, 11, 12 1, 2, 3, 4, 5, 6, 9, 11, 12 4, 5
4. Balance sheet recognition, 15, 19, 20, computation of pension 22, 23 expense. 5. Corridor calculation. 6. Prior service cost. 18 12, 13, 20
6, 10
3, 9, 11, 12, 1, 2, 3, 4, 13, 14 5, 6, 7, 8, 9, 11, 12 8, 13, 14, 16, 17, 18 1, 2, 3, 5, 9, 11, 12, 13, 14 2, 3, 5, 6, 7, 8, 11, 12 1, 2, 3, 4, 6, 7, 8, 9, 11, 12
2, 5, 7
7 5, 6, 8
3, 4, 5, 6 1, 4
7. Gains and losses. 8. Disclosure issues. 9. Special Issues. *10. Postretirement benefits.
14, 17, 21, 22 23 25 30, 31, 32, 33
7, 9 10
8, 9, 13, 14, 1, 2, 3, 4, 5, 6, 16, 17 7, 8, 9, 11, 12 9, 11, 12 11, 12
4, 5, 6 3, 4
11, 12
19, 20, 21, 22, 23, 24
13, 14
*This material is dealt with in an Appendix to the chapter.
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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives 1. Distinguish between accounting for the employers pension plan and accounting for the pension fund. Identify types of pension plans and their characteristics. Explain alternative measures for valuing the pension obligation. List the components of pension expense. Use a worksheet for employers pension plan entries. Describe the amortization of prior service costs. 1, 2, 4 3 1, 2, 6, 11, 12, 13, 15 3, 4, 7, 10, 11, 14, 18 1, 2, 5, 7, 12, 13 12, 13 1, 2, 4, 7, 8, 9, 10, 11, 12 1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 3, 4, 5, 6, 8, 11, 12 1, 2, 3, 4, 8, 11, 12 13, 14 13, 14 Brief Exercises Exercises Problems
2. 3. 4. 5.
6.
5
7.
Explain the accounting for unexpected gains and losses. Explain the corridor approach to amortizing gains and losses. Describe the requirements for reporting pension plans in financial statements. Identify the differences between pensions and postretirement healthcare benefits. Contrast accounting for pensions to accounting for other postretirement benefits. 7 6, 8, 9, 10 11, 12 11, 12
8. 9. *10. *11.
8, 12, 13, 16, 17, 18 9, 11,12, 13 19, 20, 21, 22, 23, 24 19, 20, 21, 22, 23, 24
20-2
Copyright 2010 John Wiley & Sons, Inc.
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ASSIGNMENT CHARACTERISTICS TABLE
Item E20-1 E20-2 E20-3 E20-4 E20-5 E20-6 E20-7 E20-8 E20-9 E20-10 E20-11 E20-12 E20-13 E20-14 E20-15 E20-16 E20-17 E20-18 *E20-19 *E20-20 *E20-21 *E20-22 *E20-23 *E20-24 P20-1 P20-2 P20-3 P20-4 P20-5 P20-6 P20-7 P20-8 P20-9 P20-10 P20-11 P20-12 *P20-13 *P20-14 Description Pension expense, journal entries. Computation of pension expense. Preparation of pension worksheet. Basic pension worksheet. Application of years-of-service method. Computation of actual return. Basic pension worksheet. Application of the corridor approach. Disclosures: Pension expense and other comprehensive income. Pension worksheet. Pension expense, journal entries, statement presentation. Pension expense, journal entries, statement presentation. Computation of actual return, gains and losses, corridor test, and pension expense. Worksheet for E20-13. Pension expense, journal entries. Amortization of accumulated OCI (G/L), corridor approach, pension expense computation. Amortization of accumulated OCI balances. Pension worksheetmissing amounts. Postretirement benefit expense computation. Postretirement benefit worksheet. Postretirement benefit expense computation. Postretirement benefit expense computation. Postretirement benefit worksheet. Postretirement benefit worksheetmissing amounts. 2-year worksheet. 3-year worksheet, journal entries, and reporting. Pension expense, journal entries, amortization of loss. Pension expense, journal entries for 2 years. Computation of pension expense, amortization of net gain or loss-corridor approach, journal entries for 3 years. Computation of prior service cost amortization, pension expense, journal entries, and net gain or loss. Pension worksheet. Comprehensive 2-year worksheet. Comprehensive 2-year worksheet. Pension worksheetmissing amounts. Pension worksheet. Pension worksheet. Postretirement benefit worksheet. Postretirement benefit worksheet2 years. Level of Time Difficulty (minutes) Simple 510 Simple 1015 Moderate 1525 Simple 1015 Moderate 1525 Simple 1015 Moderate 1525 Moderate 2025 Moderate 2535 Moderate 2025 Moderate 2030 Moderate 2030 Complex 3545 Complex Moderate Moderate Moderate Moderate Moderate Moderate Simple Simple Moderate Moderate Moderate Complex Complex Moderate Complex Complex Moderate Complex Moderate Moderate Moderate Moderate Moderate Moderate 4050 1520 2535 3040 2025 510 2530 1012 1012 1520 2530 4050 4555 4050 3040 4555 4560 3545 4560 4045 2530 3545 3545 3035 4045
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ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item CA20-1 CA20-2 CA20-3 CA20-4 CA20-5 CA20-6 CA20-7 Description Pension terminology and theory. Pension terminology. Basic terminology. Major pension concepts. Implications of GAAP rules on pensions. Gains and losses, corridor amortization. Nonvested employeesan ethical dilemma. Level of Difficulty Moderate Moderate Simple Moderate Complex Moderate Moderate Time (minutes) 3035 2530 2025 3035 5060 3040 2030
20-4
Copyright 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
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SOLUTIONS TO CODIFICATION EXERCISES
CE20-1
Master Glossary (a) The actuarial present value of benefits (whether vested or nonvested) attributed, generally by the pension benefit formula, to employee service rendered before a specified date and based on employee service and compensation (if applicable) before that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same. A plan that defines postretirement benefits in terms of monetary amounts (for example, $100,000 of life insurance) or benefit coverage to be provided (for example, up to $200 per day for hospitalization, or 80 percent of the cost of specified surgical procedures). Any postretirement benefit plan that is not a defined contribution postretirement plan is, for purposes of Subtopic 715 60, a defined benefit postretirement plan. (Specified monetary amounts and benefit coverage are collectively referred to as benefits). The value, as of a specified date, of an amount or series of amounts payable or receivable thereafter, with each amount adjusted to reflect the time value of money (through discounts for interest) and the probability of payment (for example, by means of decrements for events such as death, disability, or withdrawal) between the specified date and the expected date of payment. The cost of retroactive benefits granted in a plan amendment. Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods before the amendment.
(b)
(c)
(d)
CE20-2
According to FASB ASC 715-30-35-43 (Defined-Benefit Plans Pension Discount Rates): Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost.
CE20-3
According to FASB ASC 715-30-35-4 (Defined-Benefit Plans Pension Components of Net Periodic Cost): All of the following components shall be included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan:
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CE 20-3 (Continued)
(a) (b) (c) (d) (e) Service cost Interest cost Actual return on plan assets, if any Amortization of any prior service cost or credit included in accumulated other comprehensive income Gain or loss (including the effects of changes in assumptions), which includes, to the extent recognized (see paragraph 715-30-35-26), amortization of the net gain or loss included in accumulated other comprehensive income Amortization of any net transition asset or obligation existing at the date of initial application of this Subtopic and remaining in accumulated other comprehensive income.
(f)
CE20-4
According to FASB ASC 715-20-50-6 (Defined-Benefit Plans General Interim Disclosure Requirements for Publicly Traded Entities): A publicly traded entity shall disclose the following information for its interim financial statements that include a statement of income: (a) The amount of net benefit cost recognized, for each period for which a statement of income is presented, showing separately each of the following: 1. 2. 3. 4. 5. 6. 7. (b) The service cost component The interest cost component The expected return on plan assets for the period The gain or loss component The prior service cost or credit component The transition asset or obligation component The gain or loss recognized due to a settlement or curtailment.
The total amount of the employers contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 715-2050-1(g). Estimated contributions may be presented in the aggregate combining all of the following: 1. 2. 3. Contributions required by funding regulations or laws Discretionary contributions Noncash contributions.
20-6
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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ANSWERS TO QUESTIONS
* * 1. A private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the companys practices. In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost. ** 2. A defined-contribution plan specifies the employers contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employers profit, or compensation levels. A defined-benefit plan specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits. In a defined-contribution plan, the employers obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined-benefit plan, the employers obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits. ** 3. The employer is the organization sponsoring the pension plan. The employer incurs the costs and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements. The pension fund or plan is the entity which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients. Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients. Accounting for the pension costs and obligations of the employer is the topic of this chapter; accounting for the pension fund is not. ** 4. When the term fund is used as a noun, it refers to assets accumulated in the hands of a funding agency for the purpose of meeting pension benefits when they become due. When the term fund is used as a verb, it means to pay over to a funding agency (as to fund future pension benefits or to fund pension cost). ** 5. An actuarys role is to ensure that the company has established an appropriate funding pattern to meet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets). In order to determine the companys pension obligation, the actuary must first determine the expected benefits that will be paid in the future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disablement and retirement, changes in compensation, and changes in discount rates to reflect the time value of money. * *6. In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries.
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
20-7
Questions Chapter 20 (Continued) ** 7. One measure of the pension obligation is the vested benefit obligation. This measure uses only current salary levels and includes only vested benefits; that is, benefits the employee is already entitled to receive even if the employee renders no additional services under the plan. A companys accumulated benefit obligation is the actuarial present value of benefits attributed by the pension benefit formula to service before a specified date and is based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The projected benefit obligation is based on vested and nonvested services using future salaries. ** 8. Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by the employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis. Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees. Frequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period. Cash-basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year. Funding is a matter of financial management, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations. ** 9. The five components of pension expense are: (1) Service cost componentthe actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. (2) Interest cost componentthe increase in the projected benefit obligation as a result of the passage of time. (3) Actual return on plan assets componentthe reduction in pension cost for actual investment income from plan assets and the change in the market value of plan assets. (4) Amortization of prior service costthe cost of retroactive benefits granted in a plan amendment (including initiation of a plan). (5) Gains and lossesa change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or expected or from a change in an actuarial assumption. Note to instructor: Regarding return on plan assets, the final component is expected rate of return. We are assuming above that an adjustment is made to the actual return to determine expected return. 10. The service cost component of net periodic pension expense is determined as the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. The plans benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period. The FASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them. 11. The interest component is the interest for the period on the projected benefit obligation outstanding during the period. The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates). Companies should look to rates of return on high-quality fixedincome investments currently available whose cash flows match the timing and amount of the expected benefit payments.
20-8
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Questions Chapter 20 (Continued) *12. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. Actuaries compute service cost at the present value of the new benefits earned by employees during the year. Prior service cost is the cost of retroactive benefits granted in a plan amendment or initiation of a pension plan. The cost of the retroactive benefits is the increase in the projected benefit obligation at the date of the amendment. *13. When a defined-benefit plan is either initiated or amended, credit is often given to employees for years of service provided before the date of initiation or amendment. The cost of these retroactive benefits are referred to as prior service costs. Employers grant retroactive benefits because they expect to receive benefits in the future. As a result, prior service cost should not be recognized as pension expense entirely in the year of amendment or initiation. It is recognized as an adjustment to other comprehensive income. It should be recognized during the service periods of those employees who are expected to receive benefits under the plan. Consequently, prior service cost is amortized over the service life of employees who will receive benefits and is a component of net periodic pension expense each period. *14. Liability gains and losses are unexpected gains or losses from changes in the projected benefit obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting from unexpected increases) are recognized in other comprehensive income. The accumulated gains and losses are then amortized, subject to complex amortization guidelines in other comprehensive income. *15. If pension expense recognized in a period exceeds the current amount funded, a liability account referred to as Pension Asset /Liability arises; the account would be reported either as a current or long-term liability, depending on the ultimate date of payment. If the current amount funded exceeds the amount recognized as pension expense, an asset account referred to as Pension Asset /Liability arises; the account would be reported as a non-current asset. Because these assets are used to fund the pension obligation, noncurrent classification is appropriate. *16. Computation of actual return on plan assets Fair value of plan assets at end of period .................................. Deduct: Fair value of plan assets at beginning of period........... Increase in fair value of assets .................................................. Deduct: Contributions to plan during the period ........................ Add: Benefits paid during the period .................................... Actual return on plan assets ...................................................... $10,150,000 9,500,000 650,000 $1,000,000 1,400,000 400,000 $ 1,050,000
*17. An asset gain occurs when the actual return on the plan assets is greater than the expected return on plan assets while an asset loss occurs when the actual return is less than the expected return on the plan assets. A liability gain results from unexpected decreases in the pension obligation and a liability loss results from unexpected increases in the pension obligation. *18. Corridor amortization occurs when the accumulated OCI (G/L) balance gets too large. The gain or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits.
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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20-9
Questions Chapter 20 (Continued) *19. The amount of the pension asset/liability to be reported on the companys balance sheet is as follows: Projected benefit obligation.......................................................... Pension plant assets.................................................................... Pension liability ............................................................................ $(400,000) 350,000 $ (50,000)
In the financial statements, the company will report a pension liability of $50,000. This amount is also referred to as the funded status of the plan. *20. The prior service cost arising in the year of the amendment (which increases the projected benefit obligation) is recognized by an offsetting debit to Other Comprehensive Income (PSC). In subsequent periods, the $9,150,000 will be amortized into periodic pension expense over the remaining service lives of the employees. This approach is consistent with the treatment for actuarial gains and losses. *21. Actuarial gains or losses arise from (1) asset gains or losses (when the expected return is different than the actual return on plan assets) and (2) a liability gain or loss (when actuarial assumptions do not coincide with actual experiences related to computation of the projected benefit obligation.) In the period that they arise, these gains and losses are not recognized as part of pension expense, but are recognized as increases or decreases in other comprehensive income. In subsequent periods, these amounts are amortized into periodic pension expense over the remaining service lives of the employees, using corridor amortization.
*22. (a) Other Comprehensive Income for 2011 is as follows: Actuarial liability gain ...................................................................... Asset loss ....................................................................................... Other comprehensive loss .............................................................. (b) The computation of comprehensive income for 2011 is as follows: Net income ..................................................................................... Other comprehensive loss .............................................................. Comprehensive income .................................................................. $25,000 4,000 $21,000 $ 10,000 14,000 ($ 4,000)
*23. Multiple plans may be combined and shown as one amount on the balance sheet, only if they are in the same under or overfunded position. For example, if the company has two or more under-funded (overfunded) plans, the underfunded (overfunded) plans are combined and shown as one amount as a liability (asset) on the balance sheet. The FASB rejected the alternative of combining all plans and representing the net amount as a single net asset or net liability. The rationale: A company does not have the ability to offset the excess of one plan against underfunded obligations of another plan. Furthermore, netting all plans is inappropriate because offsetting assets and liabilities is not permitted under GAAP unless a right of offset exists. *24. (a) (b) (c) (d) A contributory plan is a pension plan under which employees contribute part of the cost. In some contributory plans, employees wishing to be covered must contribute; in other contributory plans, employee contributions result in increased benefits. Vested benefits are benefits for which the employees right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer. Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment. The years-of-service method is used to allocate prior service cost to the remaining years of service of the affected employees. Each year receives a fraction of the original cost with the fraction depicting the number of service-years received out of the total service-years to be worked by the affected employees.
20-10
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Questions Chapter 20 (Continued) *25. The accounting issue that arises from these terminations is whether a gain should be recognized by the corporation when these assets revert (often called asset reversion transactions) to the company. The profession requires that these gains or losses be reported immediately in most situations. 26. The accounting for various forms of compensation plans under iGAAP is found in IAS 19 Employee Benefits and IFRS 2 Share-Based Payment. IAS 19 addresses the accounting for a wide range of compensation elementswages, bonuses, postretirement benefits, and compensated absences. The primary iGAAP literature has recently been amended, resulting in significant convergence between iGAAP and U.S. GAAP in this area. For example, iGAAP and U.S. GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar. For defined benefit plans, both iGAAP and U.S. GAAP recognize the net of the pension assets and liabilities on the balance sheet and both GAAPs amortize prior service costs into income over the expected service lives of employees. Notable differences are that (1) Unlike U.S. GAAP, which recognizes prior service cost on the balance sheet (as an element of Accumulated Other Comprehensive Income), iGAAP does not recognize prior service costs on the balance sheet, (2) Under iGAAP companies have the choice of recognizing actuarial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees. U.S. GAAP does not permit choice; actuarial gains and losses (and prior service cost) are recognized in Accumulated Other Comprehensive Income and amortized to income over remaining service lives. 28. Cadbury Company will record higher income relative to the U.S. company. This is because all of the unexpected gain will be reported in income, while the U.S. company will amortize only the amount outside the corridor over the remaining service lives of the employees (10 years). In this case, the U.S. company would recognize just $1,000 ($10,000 10). Similar effects would occur for unexpected losses. The FASB and the IASB are working collaboratively on a postretirement-benefit project. As discussed in the chapter, the FASB has issued a rule addressing the recognition of benefit plans in financial statements The FASB has begun work on the second phase of the project, which will reexamine expense measurement of postretirement benefit plans. The IASB also has added a project in this area but they are on different schedule. The IASB has recently issued a discussion paper on pensions proposing: (1) elimination of smoothing via the corridor approach, (2) a different presentation of pension costs in the income statement, and (3) a new category of pensions for accounting purposesso-called contribution-based promises. The IASB is monitoring the FASBs progress and hopes to issue a converged standard in this area by 2010. Postretirement benefits other than pensions include healthcare and other welfare benefits provided to retirees, their spouses, dependents, and beneficiaries. The other welfare benefits include life insurance offered outside a pension plan, dental care as well as medical care, eye care, legal and tax services, tuition assistance, day care, and housing activities.
27.
29.
*30
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20-11
Questions Chapter 20 (Continued) *31. The FASB did not cover both pensions and healthcare benefits in the earlier pension accounting rules because of the significant differences between the two types of postretirement benefits. These differences are listed in the following schedule: Differences between Postretirement Healthcare Benefits and Pensions Item Funding Benefit Beneficiary Benefit Payable Predictability Pensions Generally funded. Well-defined and level dollar amount. Retiree (maybe some benefit to surviving spouse). Monthly. Variables are reasonably predictable. Healthcare Benefits Generally NOT funded. Generally uncapped and great variability. Retiree, spouse, and other dependents. As needed and used. Utilization difficult to predict. Level of cost varies geographically and fluctuates over time.
*32. The major differences between pension benefits and postretirement benefits are listed below: Differences between Postretirement Healthcare Benefits and Pensions Item Funding Benefit Beneficiary Benefit Payable Predictability Pensions Generally funded. Well-defined and level dollar amount. Retiree (maybe some benefit to surviving spouse). Monthly. Variables are reasonably predictable. Healthcare Benefits Generally NOT funded. Generally uncapped and great variability. Retiree, spouse, and other dependents. As needed and used. Utilization difficult to predict. Level of cost varies geographically and fluctuates over time.
Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds under ERISA, the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits. *33. EPBO (expected postretirement benefit obligation) is the actuarys present value of all benefits expected to be paid after retirement, while APBO (accumulated postretirement benefit obligation) is the actuarial present value of future benefits attributed to employees services rendered to a particular date. The components of postretirement expense are service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gains and losses.
20-12
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 20-1 Service cost ........................................................... Interest on PBO...................................................... Return on plan assets ........................................... Amortization of prior service cost ........................ Amortization of net loss ........................................ Pension expense ................................................... BRIEF EXERCISE 20-2 Ending plan assets ................................................ Beginning plan assets ........................................... Increase in plan assets.......................................... Deduct: Contributions .......................................... Less: Benefits paid ................................ Actual return on plan assets ................................. BRIEF EXERCISE 20-3 BEATY COMPANY
General Journal Entries Pension Expense 27,500 Dr. 28,000 Dr. 25,000 Cr. 20,000 Cr. 30,500 Dr. 20,000 Cr. 10,500 Cr. 10,500 Cr. Memo Record Projected Pension Benefit Plan Asset /Liability Obligation Assets 280,000 Cr. 280,000 Dr. 27,500 Cr. 28,000 Cr. 25,000 Dr. 20,000 Dr. 17,500 Dr. 17,500 Cr. 318,000 Cr. 307,500 Dr.
$ 370,000,000 672,000,000 (747,000,000) 16,000,000 25,000,000 $ 336,000,000
$2,000,000 1,780,000 220,000 $120,000 200,000 (80,000) $ 300,000
Items 1/1/10 Service cost Interest cost Actual return* Contributions Benefits Journal entry 12/31/10
Cash
*Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.
20-13
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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BRIEF EXERCISE 20-4 Pension Expense .................................................... Cash ................................................................. BRIEF EXERCISE 20-5 Cost per service year: $160,000/2,000 = $80 2010 amortization: 350 X $80 = $28,000 BRIEF EXERCISE 20-6 Project benefit obligation........................................................ Plan assets at fair value .......................................................... Pension liability ....................................................................... BRIEF EXERCISE 20-7 Net loss in accumulated OCI .................................................. Corridor (10% X $3,300,000) ................................................... Excess ...................................................................................... Average remaining service life ............................................... Minimum amortization ............................................................ BRIEF EXERCISE 20-8 Projected benefit obligation ................................................... Fair value of plan assets ......................................................... Pension liability (classified short-term or long-term depending on when due) ................................... $2,600,000 2,000,000 $ 600,000 $465,000 330,000 135,000 7.5 $ 18,000 $(560,000) 322,000 $(238,000) 32,000,000 32,000,000
Prior service cost is reported as a component of accumulated other comprehensive income in stockholders equity.
20-14
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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BRIEF EXERCISE 20-9 (a) Other Comprehensive Loss for 2010 is as follows: Actuarial liability loss .............................................. Unexpected asset gain............................................. Other comprehensive loss ...................................... ($28,000) 18,000 ($10,000)
(b) The computation of comprehensive income for 2010 is as follows: Net income ................................................................ Other comprehensive loss ...................................... Comprehensive income ........................................... BRIEF EXERCISE 20-10 Pension Assets (at fair value) $600,000 $900,000 $550,000 Projected Benefit Obligation $500,000 $720,000 $700,000 Pension Asset / Liability $100,000 asset $180,000 asset $150,000 liability $ 26,000 (10,000) $ 16,000
Plan X Plan Y Plan Z
Lahey reports a pension asset of $280,000 ($100,000 + $180,000) and a pension liability of $150,000. *BRIEF EXERCISE 20-11 Service cost .............................................................................. Interest cost .............................................................................. Expected return on plan assets ............................................... Postretirement expense ........................................................... *BRIEF EXERCISE 20-12 Postretirement Expense ............................................... Cash ....................................................................... Postretirement Asset /Liability ............................. 240,900 180,000 60,900 $40,000 47,400 (26,900) $60,500
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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20-15
SOLUTIONS TO EXERCISES
EXERCISE 20-1 (510 minutes) (a) Computation of pension expense: Service cost ..................................................... Interest cost ($500,000 X .10) ......................... Expected return on plan assets ..................... Prior service cost amortization ...................... Pension expense for 2010 .............................. (b) Pension Expense .................................................... Cash ................................................................. Pension Asset /Liability ................................... Other Comprehensive Income (PSC) ............. EXERCISE 20-2 (1015 minutes) Computation of pension expense: Service cost............................................................. Interest cost ($700,000 X 10%) ............................... Expected return on plan assets ............................. Prior service cost amortization .............................. Pension expense for 2010 ...................................... $ 90,000 70,000 (64,000) 10,000 $106,000 103,000 90,000 5,000 8,000 $ 60,000 50,000 (15,000) 8,000 $103,000
20-16
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EXERCISE 20-3 (1525 minutes)
Items
BICKNER COMPANY Pension Worksheet2010 General Journal Entries Annual OCI Pension Prior Service Pension Expense Cash Cost Asset/Liability 60,000 Cr.
Memo Record Projected Benefit Obligation Plan Assets 700,000 Cr. 90,000 Cr. 70,000 Cr. 640,000 Dr. 64,000 Dr. 40,000 Dr. 105,000 Dr. 40,000 Cr. 769,000 Dr.
Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
Balance, January 1, 2010 Service cost 90,000 Dr. Interest cost* 70,000 Dr. Actual return** 64,000 Cr. Amortization of PSC 10,000 Dr. 10,000 Cr. Contributions 105,000 Cr. Benefits Journal entry for 2010*** 106,000 Dr. 105,000 Cr. 10,000 Cr. 150,000 Dr. Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 140,000 Dr. *$70,000 = $700,000 X 10%.
9,000 Dr. 51,000 Cr. 820,000 Cr.
**Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense. ***Pension Expense ................................................. ***Pension Asset/Liability ........................................ Other Comprehensive Income (PSC) ......... Cash ............................................................. 106,000 9,000 10,000 105,000
20-17
20-2
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-4 (1015 minutes)
Items Balance, January 1, 2010 Service cost Interest cost* Actual return** Contributions Benefits Journal entry, December 31 Balance, December 31, 2010 *$39,200 = $490,000 X .08.
BOUDREAU INC. Pension Worksheet2010 General Journal Entries Annual Pension Pension Asset/ Expense Cash Liability 40,000 Dr. 39,200 Dr. 49,700 Cr. 25,000 Cr. 29,500 Dr. 25,000 Cr. 4,500 Cr. 4,500 Cr.
Memo Record Projected Benefit Plan Obligation Assets 490,000 Cr. 490,000 Dr. 40,000 Cr. 39,200 Cr. 49,700 Dr. 25,000 Dr. 33,400 Dr. 33,400 Cr. 535,800 Cr. 531,300 Dr.
**Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.
EXERCISE 20-5 (1525 minutes) Computation of Service-Years Year 2010 2011 2012 2013 2014 2015 Jim 1 1 1 Paul 1 1 1 1 Nancy 1 1 1 1 1 5 Dave 1 1 1 1 1 1 6 Kathy 1 1 1 1 1 1 6 Total 5 5 5 4 3 2 24
3
4
Cost per service-year: $72,000 24 = $3,000 Computation of Annual Prior Service Cost Amortization Year 2010 2011 2012 2013 2014 2015 Total Service-Years 5 5 5 4 3 2 Cost Per Service-Year $3,000 3,000 3,000 3,000 3,000 3,000 Annual Amortization $15,000 15,000 15,000 12,000 9,000 6,000 $72,000
EXERCISE 20-6 (1015 minutes) Computation of Actual Return on Plan Assets Fair value of plan assets at 12/31/10 ...................... Fair value of plan assets at 1/1/10 .......................... Increase in fair value of plan assets ....................... Deduct: Contributions to plan during 2010........... Less benefits paid during 2010 ............... Actual return on plan assets for 2010 .................... $2,725,000 2,400,000 325,000 $280,000 350,000 (70,000) $ 395,000
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20-2
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-7 (1525 minutes)
Items Balance, Dec. 31, 2009 Prior service cost Balance, Jan. 1, 2010 Service cost Interest cost* Actual return** Amortization of PSC Contributions Benefits Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 *$61,200 = $680,000 X .09.
RYDELL CORP. Pension Worksheet2010 General Journal Entries Annual OCIPrior Pension Service Expense Cash Cost 0 120,000 Dr. 58,000 Dr. 61,200 Dr. 52,280 Cr. 17,000 Dr. 65,000 Cr. 83,920 Dr.
Pension Asset/ Liability 13,800 Cr.
Memo Record Projected Benefit Plan Obligation Assets 560,000 Cr. 546,200 Dr. 120,000 Cr. 680,000 Cr. 546,200 Dr. 58,000 Cr. 61,200 Cr. 52,280 Dr. 40,000 Dr. 65,000 Dr. 40,000 Cr. 623,480 Dr.
17,000 Cr. 65,000 Cr. 103,000 Dr. 0 103,000 Dr. 121,920 Cr. 135,720 Cr. 759,200 Cr.
**Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.
EXERCISE 20-8 (2025 minutes) Corridor and Minimum Loss Amortization
Projected Benefit Obligation (a) $2,000,000 2,400,000 2,950,000 3,600,000 Plan Assets $1,900,000 2,500,000 2,600,000 3,000,000 10% Corridor $200,000 250,000 295,000 360,000 Accumulated OCI (G/L) (a) $ 0 280,000 367,000(c) 372,000(e) Minimum Amortization of Loss $ 0 3,000(b) 6,000(d) 1,000(f)
Year 2009 2010 2011 2012 (a) (b) (c) (d) (e) (f)
As of the beginning of the year. ($280,000 $250,000) 10 years = $3,000 $280,000 $3,000 + $90,000 = $367,000 ($367,000 $295,000) 12 years = $6,000 $367,000 $6,000 + $11,000 = $372,000 ($372,000 $360,000) 12 years = $1,000
EXERCISE 20-9 (2535 minutes) (a) Note to financial statements disclosing components of 2010 pension expense: Note X: Net pension expense for 2010 is composed of the following components of pension cost: Service cost ............................................................. Interest cost ............................................................. Expected return on plan assets .............................. Prior service cost amortization .............................. Pension expense .............................................. (b) Comprehensive income, 2010 Amortization of prior service cost .......................... Actuarial loss ........................................................... Other comprehensive loss ...................................... Comprehensive income, 2010 Net income ............................................................... Other comprehensive loss...................................... Comprehensive income ..........................................
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual
$ 94,000 253,000 (175,680) 42,000 $213,320
$ (42,000) 45,680 $ 3,680 $ 35,000 3,680 $ 31,320
20-21
(For Instructor Use Only)
EXERCISE 20-9 (Continued) (c) Accumulated OCI at December 31, 2010 is $255,680; this amount is comprised of the following: PSC $252,000 Dr. 42,000 Cr. $210,000 Dr. Gain/Loss $ 0 45,680 Dr. $45,680 Dr.
Balance Jan. 1, 2010* Amortization of PSC Actuarial loss Balance Dec. 31, 2010 *$210,000 + $42,000
20-22
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Copyright 2010 John Wiley & Sons, Inc.
EXERCISE 20-9 (Continued)
General Journal Entries Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual return Unexpected gain Amortization of PSC 94,000 Dr. 253,000 Dr. 130,000 Cr. 45,680 Cr. 42,000 Dr. OCIPrior Service Cost OCI Gain/Loss Pension Asset/ Liability
Memo Record Projected Benefit Obligation
1
Cash
Plan Assets
2
335,000 Cr. 2,530,000 Cr. 2,195,000 Dr. 94,000 Cr. 253,000 Cr. 130,000 Dr. 45,680 Dr. 42,000 Cr.
Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
Contributions 93,329 Cr. Benefits Journal entry for 2010 213,320 Dr. 93,329 Cr. 42,000 Cr. Accumulated OCI, Dec. 31, 2009 252,000 Dr. Balance, Dec. 31, 2009 210,000 Dr. 1. 2. $2,737,000 + $140,000 $253,000 $94,000. $2,278,329 + $140,000 $93,329 $130,000.
140,000 Dr. 45,680 Dr. 0 45,680 Dr. 123,671 Cr. 458,671 Cr. 2,737,000
93,329 Dr. 140,000 Cr.
2,278,329 Dr.
20-23
20-2
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-10 (2025 minutes)
(a)
Items
Balance, Jan. 1, 2010 Service cost Interest cost* Actual return Unexpected gain** Amortization of PSC Liability increase Contributions Benefits Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, December 31, 2010
Annual Pension Expense 90,000 Dr. 54,000 Dr. 55,000 Cr. 3,000 Dr. 19,000 Dr.
WEBB CORP. Pension Worksheet General Journal Entries OCIPrior Service OCI Cash Cost Gain/Loss
Pension Asset/ Liability 120,000 Cr.
Memo Record Projected Benefit Obligation Plan Assets 600,000 Cr. 90,000 Cr. 54,000 Cr. 480,000 Dr.
55,000 Dr. 3,000 Cr. 19,000 Cr. 76,000 Dr. 99,000 Cr. 85,000 Dr. 76,000 Cr. 99,000 Dr. 85,000 Cr.
111,000 Dr. 99,000 Cr.
19,000 Cr. 100,000 Dr 81,000 Dr.
73,000 Dr. 0 73,000 Dr.
66,000 Cr. 186,000 Cr. 735,000 Cr. 549,000 Dr.
*$54,000 = $600,000 X .09. **Expected return = $52,000. Unexpected gain = Actual return minus expected return; $3,000 = $55,000 $52,000. (b) Journal Entry Pension Expense .................................................................. Other Comprehensive Income (G/L) ................................... Cash .......................................................................... Other Comprehensive Income (PSC) .................... Pension Asset /Liability...........................................
111,000 73,000 99,000 19,000 66,000
EXERCISE 20-11 (2030 minutes) (a) Pension expense for 2010 composed of the following: Service cost ...................................................... Interest on projected benefit obligation (9% X $900,000) ............................................. Expected return on plan assets ....................... Amortization of prior service cost ................... Pension expense ....................................... (b) Pension Expense ..................................................... Pension Asset /Liability............................................. Cash.................................................................... Other Comprehensive Income (PSC) ............... (c) Income Statement Pension expense ............................................... Comprehensive Income Statement Net income ................................................................. Other comprehensive income Amortization of PSC............................................... Comprehensive income ............................................ Balance Sheet Liabilities Pension liability ................................................. *Projected benefit obligation Plan assets Pension liability Partial worksheet Bal. January 1, 2010 Service cost Interest on PBO Actual return Contribution Bal. December 31,2010 $1,037,000 799,000 $ 238,000 Plan Assets $600,000 54,000 145,000 $799,000 400,000 (50,000) 350,000
(For Instructor Use Only)
$ 56,000 81,000 (54,000) 50,000 $133,000
133,000 62,000 145,000 50,000 $133,000 $ XXXX 50,000 $ XXXX
$238,000*
Projected Benefit Obligation $ 900,000 56,000 81,000 $1,037,000
Stockholders equity Accumulated OCI (PSC) Jan. 1, 2010 Amortization of prior service cost Accumulated OCI (PSC) Dec. 31, 2010
Copyright 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
20-25
EXERCISE 20-12 (2030 minutes) (a) Pension expense for 2010 composed of the following: Service cost ................................................... Interest on projected benefit obligation (10% X $1,500,000) .................................... Expected return on plan assets (10% X $800,000) ....................................... Amortization of prior service cost ............... Pension expense ................................... (b) Pension Expense .................................................. Pension Asset /Liability ........................................ Cash ............................................................... Other Comprehensive Income (PSC) ........... Other Comprehensive Income (G/L) ............ (To record pension expense and employers contribution) (c) Income Statement: Pension expense ........................................... 267,000 303,000 250,000 120,000 200,000 $ 77,000 150,000 (80,000) 120,000 $267,000
$ 267,000
Comprehensive Income Statement Net income ..................................................... $ XXXX Other comprehensive income (loss) Amortization of PSC ............................... $120,000 320,000 Liability gain ............................................ 200,000 Comprehensive income........................................ $ XXXX Balance Sheet: Liabilities Pension liability ..................................... Stockholders Equity Accumulated OCI (PSC) ................................ Accumulated OCI (G/L) ................................. *Projected benefit obligation, Dec. 31, 2010 Plan assets, Dec. 31, 2010 Pension liability **$1,200,000 $120,000
20-26
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
$ 397,000* $1,080,000** 200,000
$1,527,000 (1,130,000) $ 397,000
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-12 (Continued)
Note to instructor: To prove the amounts reported, a worksheet might be prepared as follows: General Journal Entries Annual Pension Expense OCIPrior Service Cost OCI Gain/Loss Pension Asset/Liability Memo Record Projected Benefit Obligation
Items
Cash
Plan Assets 800,000 Dr.
Balance, Jan. 1, 2010 Service cost 77,000 Dr. Interest cost* 150,000 Dr. Actual return** 80,000 Cr. Amortization of PSC 120,000 Dr. 120,000 Cr. Liability gain Contributions 250,000 Cr. Journal entry, for 2010 267,000 Dr. 250,000 Cr. 120,000 Cr. Accumulated OCI, Dec. 31, 2009 1,200,000 Dr. Balance, Dec. 31, 2010 1,080,000 Dr. *$1,500,000 X 10%.
700,000 Cr. *1,500,000 Cr. 77,000 Cr. 150,000 Cr.
80,000 Dr. 200,000 Cr. 200,000 Cr. 0 200,000 Cr. 303,000 Dr. 397,000 Cr. 1,527,000 Cr. 1,130,000 Dr. 200,000 Dr. 250,000 Dr.
**Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.
20-2
EXERCISE 20-13 (3545 minutes) (a) Actual Return = (Ending Beginning) (Contributions Benefits) Fair value of plan assets, December 31, 2010 ........................................ $2,620 Deduct: Fair value of plan assets, 1,700 January 1, 2010.............................................. Increase in fair value of plan assets ................ 920 Deduct: Contributions ...................................... $700 200 500 Less benefits paid............................... Actual return on plan assets in 2010 ............... $ 420 (b) Computation of pension liability gains and losses and pension asset gains and losses. 1. Difference between 12/31/10 actuarially computed PBO and 12/31/10 recorded projected benefit obligation (PBO): PBO at end of year ............................. $3,300 PBO per memo records: 1/1/10 PBO ...................................... $2,500 Add interest (10%) .......................... 250 Add service cost ............................ 400 (200) 2,950 Less benefits paid .......................... Liability loss ................................... $350 Difference between actual fair value of plan assets and expected fair value: 12/31/10 actual fair value of plan assets ............................. 2,620 Expected fair value 1/1/10 fair value of plan assets ...... 1,700 Add expected return ($1,700 X 10%) ............................ 170 Add contributions .......................... 700 (200) 2,370 Less benefits paid .......................... Asset gain ....................................... Net (gain) or loss ................................
2.
(250) $100
(c) Because no net gain or loss existed at the beginning of the period, no amortization occurs. Therefore, the corridor calculation is not needed. An example of how the corridor would have been computed is illustrated on the next page, assuming a net loss of $240 at the beginning of the year.
20-28
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-13 (Continued) Beginning-of-the-Year Year 2010 Plan PBO Assets (FV) $2,500 $1,700 10% Corridor $250 Accumulated OCI (G/L) $240 Loss Amortization -0-
(d) Pension expense for 2010: Service cost ................................................................. Interest cost ($2,500 X 10%) ........................................ Actual return on plan assets [from (a)] ...................... Unexpected gain [from (b) 2.] ..................................... Pension expense .........................................................
$ 400 250 (420) 250 $ 480
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20-30
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-14 (4050 minutes)
ERICKSON COMPANY Pension Worksheet2010 General Journal Entries Annual Pension Expense 400 Dr. 250 Dr. 420 Cr. 250 Dr. 700 Cr. 350 Dr. 100 Dr. 0 100 Dr. Cash OCI Gain/Loss Pension Asset/Liability 800 Cr.
Items
Balance, Jan. 1, 2010 Service cost (a) Interest cost (b) Actual return (c) Unexpected gain Contributions Benefits (d) Liability increase Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010
(a)
Memo Record Entries Projected Benefit Plan Obligation Assets 2,500 Cr. 400 Cr. 250 Cr. 1,700 Dr.
420 Dr. 250 Cr. 200 Dr. 350 Cr. 120 Dr. 680 Cr. 3,300 Cr. 2,620 Dr. 700 Dr. 200 Cr.
480 Dr.
700 Cr.
$2,500 X 10% $420 = ($2,620 $1,700) ($700 $200) (c) Actual return Expected return ($1,700 X 10%) Asset gain (d) $350 = $3,300 ($2,500 + $400 + $250 $200)
(b)
$420 170 $250
EXERCISE 20-14 (Continued) Journal entries 12/31/10 1. Other Comprehensive Income G/L ...................... Pension Expense .................................................. Pension Asset /Liability ........................................ Cash ............................................................... 100 480 120 700
Balance Sheet at December 31, 2010 Liabilities Pension liability ............................................. Stockholders equity Accumulated other comprehensive loss (G/L) .................................................... EXERCISE 20-15 (1520 minutes) (a) Computation of pension expense: Service cost ................................................... Interest cost ($700,000 X .10) ........................ Expected return on plan assets .................... Pension expense for 2010 ............................. Pension Expense .................................................. Pension Asset /Liability......................................... Cash................................................................ (b) Income Statement: Pension expense ........................................... Balance Sheet: Liabilities Pension liability..................................... *$25,000 $10,000 140,000 10,000 150,000 $140,000 $ 80,000 70,000 (10,000) $140,000 $680
$100
$ 15,000*
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20-31
20-32
Copyright 2010 John Wiley & Sons, Inc.
EXERCISE 20-15 (Continued)
Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual return Amortization of PSC Contributions Benefits Journal entry for 2010 Balance, Dec. 31, 2010 *$700,000 $25,000. **$800,000 ($675,000 + $10,000 + $150,000) = $35,000. 80,000 Dr. 70,000 Dr. 10,000 Cr.
Cash
Pension Asset/Liability 25,000 Cr.
Projected Benefit Obligation 700,000 Cr. 80,000 Cr. 70,000 Cr.
Plan Assets 675,000 Dr.*
Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
10,000 Dr. 150,000 Cr. 35,000 Dr. 150,000 Dr. 35,000 Cr.**
140,000 Dr.
150,000 Cr.
10,000 Cr. 15,000 Cr. 815,000 Cr. 800,000 Dr.
EXERCISE 20-16 (2535 minutes) The excess of the cumulative net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service period of employees. The average remaining service period is computed as follows:
Expected future years of service = Average remaining service life per employee Number of employees 5, 600 Average remaining service life per employee = = 14. 400
Amortization of Net (Gain) or Loss (Gain) or Loss For the Year Ended December 31, 2010 2011 2012 2013
Projected Benefit Obligation (a) $4,000,000 4,520,000 5,000,000 4,240,000 Plan Assets (a) $2,400,000 2,200,000 2,600,000 3,040,000
Amount (300,000 (480,000 (210,000) (290,000)
Accumulated OCI (G/L) (a) $ 0 300,000 780,000 550,000(d) Minimum Amortization of (Gain) Loss $ 0 0 20,000(c) 9,000(e)
Year 2010 2011 2012 2013
Corridor (b) $400,000 452,000 500,000 424,000
(a) As of the beginning of the year. (b) The corridor is 10 percent of the greater of the projected benefit obligation or plan assets. (c) $780,000 $500,000 = $280,000; $280,000/14 = $20,000. (d) $780,000 $20,000 $210,000 = $550,000. (e) $550,000 $424,000 = $126,000; $126,000/14 = $9,000.
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20-33
EXERCISE 20-17 (3040 minutes) (a) Year 2010 2011 Prior Service Cost Amortized $120,000 120,000
($1,260,000 10.5 years) ($1,260,000 10.5 years)
(b) The excess of the accumulated OCI (G/L) over the corridor amount is amortized by dividing the excess by the average remaining service life per employee. The average service life is 10.5 years. Amortization of Net (Gain) or Loss (Gain) or Loss For the Year Ended December 31, 2010 2011
Projected Benefit Obligation (a) $2,800,000 3,650,000 Plan Assets(a) $1,700,000 2,900,000
Amount ($198,000 (24,000)
Year 2010 2011
10% Corridor(b) $280,000 365,000
Accumulated OCI (G/L)(a) ($ 0 198,000
Minimum Amortization of (Gain) Loss $ 0 0(c)
(a) As of the beginning of the year. (b) The corridor is 10 percent of the greater of the projected benefit obligation or plan assets. (c) $365,000 is greater than $198,000; therefore, no amortization.
(c) Pension expense for 2010 is composed of the following: Service cost ................................................................. Interest on projected benefit obligation ($2,800,000 X 9%) .................................................... Expected return on plan assets ($1,700,000 X 10%) .................................................. Amortization of prior service cost ............................. Pension expense .................................................
$ 400,000 252,000 (170,000) 120,000 $ 602,000
20-34
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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EXERCISE 20-17 (Continued) Pension expense for 2011 is composed of the following: Service cost .................................................................... Interest on projected benefit obligation ($3,650,000 X 8%) ........................................................ Expected return on plan assets ($2,900,000 X 10%) ...................................................... Amortization of prior service cost ................................. Pension expense ..................................................... $475,000 292,000 (290,000) 120,000 $597,000
Copyright 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
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20-35
20-36
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20-17 (Continued)
General Journal Entries Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual return Amortization of PSC Contributions Actuarial loss Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Service cost Interest cost Actual return Actuarial gain Amortization of PSC Contributions Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011 *$198,000 + $24,000. 475,000 Dr. 292,000 Dr. 290,000 Cr. 222,000 Cr.* 120,000 Dr. 597,000 Dr. 600,000 Cr. 600,000 Cr. 120,000 Cr. 400,000 Dr. 252,000 Dr. 170,000 Cr. 120,000 Dr. 1,030,000 Cr. 602,000 Dr. 1,030,000 Cr. 120,000 Cr. 1,260,000 Dr. 1,140,000 Dr. 198,000 Dr. 198,000 Dr. 0 198,000 Dr. OCIPrior Service Cost OCI Gain/Loss Pension Asset/ Liability
Memo Record Projected Benefit Obligation
Cash
Plan Assets 1,700,000 Dr.
1,100,000 Cr. 2,800,000 Cr. 400,000 Cr. 252,000 Cr. 120,000 Cr.
170,000 Dr. 1,030,000 Dr. 198,000 Cr. 350,000 Dr.
750,000 Cr. 3,650,000 Cr. 475,000 Cr. 292,000 Cr.
2,900,000 Dr.
290,000 Dr. 222,000 Dr. 600,000 Dr. 120,000 Cr. 1,140,000 Dr. 1,020,000 Dr. 222,000 Cr. 198,000 Dr. 24,000 Cr. 345,000 Dr.
405,000 Cr. 4,195,000 Cr.
3,790,000 Dr.
EXERCISE 20-18 (2025 minutes) (a) Below is the completed worksheet, indicating debit and credit entries.
Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual return Unexpected gain Amortization of PSC Contributions Benefits Liability increase Journal entry Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 500 Dr. 280 Dr. 220 Cr. 150 Dr. 55 Dr. 800 Cr. 365 Dr. 215 Dr. 0 215 Dr. 200 Dr. 365 Cr. 125 Cr. 1,225 Cr. 3,745 Cr. 2,520 Dr. General Journal Entries OCIPrior OCIGain/ Service Cash Cost Loss Memo Record Projected Plan Benefit Obligation Assets 2,800 Cr. 500 Cr. 280 Cr. 1,700 Dr.
Pension Asset/Liability 1,100 Cr.
220 Dr. 150 Cr. 55 Cr. 800 Dr. 200 Cr.
765 Dr.
800 Cr.
55 Cr. 1,100 Dr. 1,045 Dr.
(b) Pension Expense ......................................... Other Comprehensive Income (G/L) ........... Pension Asset/Liability ........................... Cash ......................................................... Other Comprehensive Income (PSC) .....
765 215 125 800 55
(c) Usher records no amortization of gain or loss in 2010, because there were no gains or losses at the beginning of the year. For 2011, the corridor is $374.50 (10% of the PBO). Since the balance of the Other Comprehensive Income (G/L) at the beginning of 2011 ($215) is less than the corridor, there will be no gain or loss amortization in 2011 either. *EXERCISE 20-19 (510 minutes) Postretirement benefit expense is comprised of the following: Service cost.............................................................. Interest on the liability (8% X $330,000) ................. Actual and expected return on plan assets ........... Postretirement Expense .......................................... $45,000 26,400 (11,000) $60,400
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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20-37
EXERCISE 20-20 (2530 minutes)
General Journal Entries Annual Postretirement Postretirement Expense Cash Asset /Liability Balance, Jan. 1, 2010 Service cost Interest cost Actual return Contributions Benefits Journal entry for 2010 Balance, Dec. 31, 2010 220,000 Cr. 45,000 Dr. 26,400 Dr. 11,000 Cr. 10,000 Cr. 60,400 Dr. 10,000 Cr. 50,400 Cr. 270,400 Cr. Memo Record
Plan Assets 330,000 Cr. 110,000 Dr. 45,000 Cr. 26,400 Cr. 11,000 Dr. 10,000 Dr. 20,000 Dr. 20,000 Cr. 381,400 Cr. 111,000 Dr.
APBO
Postretirement Expense ........................................ Postretirement Asset/Liability ....................... Cash ................................................................ *EXERCISE 20-21 (1012 minutes) Service cost ................................................................... Interest on accumulated postretirement benefit obligation (10% X $710,000) ........................... Expected return on plan assets.................................... Amortization of prior service cost................................ Postretirement expense ................................................ *EXERCISE 20-22 (1012 minutes)
60,400 50,400 10,000
$ 83,000 71,000 (34,000) 21,000 $141,000
Service cost ............................................................................. Interest on accumulated postretirement benefit obligation (9% X $760,000) ........................................ Expected return on plan assets.............................................. Amortization of prior service cost.......................................... Postretirement expense .......................................................... *EXERCISE 20-23 (1520 minutes) See worksheet on next page.
20-38
$ 90,000 68,400 (62,000) 3,000 $ 99,400
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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*EXERCISE 20-23 (1520 minutes)
ENGLEHART CO. Postretirement Benefit Worksheet2010 General Journal Entries Annual Postretirement Expense 90,000 Dr. *68,400 Dr. 62,000 Cr. 56,000 Cr. 3,000 Dr. 99,400 Dr. 56,000 Cr. 3,000 Cr. 3,000 Cr. 100,000 Dr. 97,000 Dr. OCIPrior Postretirement Service Cost Asset/Liability 50,000 Cr.
Memo Record Plan Assets
Items Balance, Jan. 1, 2010 Service cost Interest cost Actual return Contributions Benefits Amortization of PSC Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 *($760,000 X 9%)
Cash
APBO
760,000 Cr. 710,000 Dr. 90,000 Cr. 68,400 Cr. 62,000 Dr. 56,000 Dr. 40,000 Dr. 40,000 Cr.
40,400 Cr. 90,400 Cr. 878,400 Cr. 788,000 Dr.
20-39
*EXERCISE 20-24 (2530 minutes) (a) Below is the completed worksheet, indicating debit and credit entries.
Annual Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual/Expected return Contributions Benefits Amortization of PSC Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010
Cash
Other Comprehensive IncomePSC
Postretirement Asset/Liability 290,000 Cr.
APBO 410,000 Cr. 56,000 Cr. 36,900 Cr.
Plan Assets 120,000 Dr.
56,000 Dr. 36,900 Dr. 2,000 Cr. 66,000 Cr.
5,000 Dr. 3,000 Dr. 93,900 Dr. 66,000 Cr. 3,000 Cr. 3,000 Cr. 30,000 Dr. 27,000 Dr. 24,900 Cr. 314,900 Cr. 497,900 Cr.
2,000 Dr. 66,000 Dr. 5,000 Cr.
183,000 Dr.
(b) Pension Expense .............................................. Cash............................................................ Other Comprehensive Income (PSC) ....... Postretirement Asset/Liability ..................
93,900 66,000 3,000 24,900
(c) The discount (settlement) rate can be determined by dividing the interest cost by the beginning APBO: $36,900 $410,000 = 9%
20-40
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TIME AND PURPOSE OF PROBLEMS
Problem 20-1 (Time 4050 minutes) Purposeto provide a problem that requires preparation of a pension worksheet for two separate years pension transactions. Included in the problem are an unexpected loss and prior service cost amortization. Problem 20-2 (Time 4555 minutes) Purposeto provide a problem that requires preparation of a pension worksheet for three separate years pension transactions, three years of general journal entries for the pension plan, and reporting in financial statements for the third year. Problem 20-3 (Time 4050 minutes) Purposeto provide a problem that requires computation of the annual pension expense, preparation of the pension journal entries, measurement of gains and losses and their amortization, and presentation in financial statements. Problem 20-4 (Time 3040 minutes) Purposeto provide a problem that requires computation of pension expense and preparation of the pension journal entries. Problem 20-5 (Time 4555 minutes) Purposeto provide a problem that requires computation of the pension expense for three separate years and the preparation of the pension journal entries for three years. Problem 20-6 (Time 4560 minutes) Purposeto provide a problem that requires computation and amortization of prior service cost, computation of pension expense, and preparation of pension journal entries. Problem 20-7 (Time 3545 minutes) Purposeto provide a problem that requires preparation of a worksheet. Problem 20-8 (Time 4560 minutes) Purposeto provide a problem that requires preparation of a comprehensive worksheet for two years, covering all facets of pension accounting. Problem 20-9 (Time 4045 minutes) Purposeto provide a problem that requires preparation of a worksheet for two years, journal entries, and indicates financial statement presentation. Problem 20-10 (Time 2530 minutes) Purposeto provide a problem to understand elements of a pension worksheet. Problem 20-11 (Time 3545 minutes) Purposeto provide a problem that requires preparation of a worksheet, journal entries, and indicates financial statement presentation (year 2 of P20-10).
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20-41
Time and Purpose of Problems (Continued)
Problem 20-12 (Time 3545 minutes) Purposeto provide a problem that requires preparation of a worksheet, journal entries, and indicates financial statement presentation. *Problem 20-13 (Time 3035 minutes) Purposeto provide a problem that requires preparation of a worksheet and entries for postretirement benefit expense. *Problem 20-14 (Time 4045 minutes) Purposeto provide a problem that requires a worksheet for two years, journal entries, and indicates financial statement presentation.
20-42
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(a)
Items
Balance, Jan. 1, 2010 Service cost Interest cost* Actual return Contributions Benefits Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Additional PSC, 1/1/2011 Balance, Jan. 1, 2011 Service cost Interest cost** Actual return Unexpected loss*** Amortization of PSC Contributions Benefits Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
CUNNINGHAM COMPANY Pension Worksheet2010 and 2011 General Journal Entries Memo Record Annual OCIPrior Projected Pension Service OCIGain/ Pension Benefit Plan Cash Cost Assets Expense Loss Asset/Liability Obligation 150,000 Dr. 450,000 Dr. 252,000 Cr. 240,000 Cr. 348,000 Dr. 240,000 Cr. 0 500,000 Dr. 180,000 Dr. 540,000 Dr. 260,000 Cr. 99,360 Cr. 90,000 Dr. 285,000 Cr. 280,000 Dr. 450,640 Dr. 285,000 Cr. 410,000 Dr. 99,360 Dr. 0 0 410,000 Dr. 99,360 Dr. 6 75, 000 C r. 1,083,000 Cr 5,840,000 Cr. 4,757,000 Dr. 0 300,000 Cr. 4,500,000 Cr. 4,200,000 Dr. 150,000 Cr. 450,000 Cr. 252,000 Dr. 240,000 Dr. 200,000 Dr. 200,000 Cr. 108,000 Cr. 408,000 Cr. 4,900,000 Cr. 4,492,000 Dr. 500,000 Cr. 5,400,000 Cr. 180,000 Cr. 540,000 Cr. 260,000 Dr. 99,360 Dr. 90,000 Cr. 285,000 Dr. 280,000 Cr.
SOLUTIONS TO PROBLEMS
PROBLEM 20-1
*$450,000 = $4,500,000 X 10%. **$540,000 = $5,400,000 X 10%. ***$99,360 = ($4,492,000 X .08) $260,000.
(b) Journal Entry (2011) Pension Expense .............................................................. Other Comprehensive Income (PSC) .............................. Other Comprehensive Income (G/L) ............................... Cash .......................................................................... Pension Asset/Liability ............................................
450,640 410,000 99,360 285,000 675,000
20-2
20-2
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(a)
JACKSON COMPANY Pension Worksheet2009, 2010, 2011 Annual Pension Expense General Journal Entries OCIPrior Service OCI Cash Cost Gain/Loss Memo Record Projected Pension Benefit Plan Asset/Liability Obligation Assets 50,000 Cr. 16,000 Dr. 25,000 Dr. 18,000 Cr. 2,000 Cr. 16,000 Cr. 14,000 Dr. 21,000 Dr. 16,000 Cr. 2,000 Dr. 0 2,000 Dr. 160,000 Dr. 19,000 Dr. 43,700 Dr. 22,000 Cr. 54,400 Dr. 40,000 Cr. 16,400 Dr. 95,100 Dr. 40,000 Cr. 105,600 Dr. 0 105,600 Dr. 0 2,000 Dr. 2,000 Dr. 160,700 Cr. 217,700 Cr. 483,300 Cr. 26,000 Cr. 48,330 Cr. 24,000 Dr. 2,560 Dr. 41,600 Cr. 48,000 Cr. 16,630 Cr. 14,070 Cr. 2,000 Dr. 12,070 Cr. 21,000 Dr. 16,630 Dr. 14,300 Dr. 203,400 Cr. 520,000 Cr. 316,600 Dr. 48,000 Dr. 21,000 Cr. 265,600 Dr. 7,000 Cr. 57,000 Cr. 277,000 Cr. 160,000 Cr. 437,000 Cr. 19,000 Cr. 43,700 Cr. 22,000 Dr. 54,400 Cr. 40,000 Dr. 16,400 Cr. 220,000 Dr. 250,000 Cr. 16,000 Cr. 25,000 Cr. 200,000 Dr.
Balance, Jan. 1, 2009 Service cost (a) Interest cost Actual return (b) Unexpected loss Contributions Benefits Journal entry for 2009 Accumulated OCI, Dec. 31, 2008 Balance, Dec. 31, 2009 Additional PSC, 1/1/2010 Balance, Jan. 1, 2010 Service cost (c) Interest cost (d) Actual return Amortization of PSC Contributions Benefits Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Service cost (e) Interest cost Actual return (f) Unexpected loss Amortization of PSC Contributions Benefits (g) Liability gain Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
18,000 Dr. 2,000 Dr. 16,000 Dr. 14,000 Cr.
PROBLEM 20-2
26,000 Dr. 48,330 Dr. 24,000 Cr. 2,560 Cr. 41,600 Dr.
89,370 Dr.
48,000 Cr.
41,600 Cr. 105,600 Dr. 64,000 Dr.
PROBLEM 20-2 (Continued) Worksheet computations:
(a)
$25,000 = $250,000 X 10% $2,000 = ($200,000 X 10%) $18,000; return expected exceeds actual return. (c) $43,700 = $437,000 X 10% (d) Expected return and actual return are the same. (e) $48,330 = $483,300 X 10% (f) $2,560 = ($265,600 X 10%) $24,000; expected return exceeds actual return. (g) $16,630 = ($483,300 + $26,000 + $48,330 $21,000 $520,000)
(b)
(Note to instructor: Because the amount of net gain or loss does not exceed 10% of the larger of the projected benefit obligation or the fair value of the plan assets at the beginning of any of the years, no amortization is recorded. (b) Journal entries: 2009 Other Comprehensive Income (G/L) ....................... Pension Expense ..................................................... Cash................................................................... Pension Asset /Liability .................................... 2010 Other Comprehensive income (PSC) ...................... Pension Expense ..................................................... Cash................................................................... Pension Asset /Liability .................................... 2011 Pension Expense ..................................................... Pension Asset /Liability............................................ Other Comprehensive Income (G/L) ................ Other Comprehensive Income (PSC) .............. Cash................................................................... 2,000 21,000 16,000 7,000 105,600 95,100 40,000 160,700 89,370 14,300 14,070 41,600 48,000
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20-45
PROBLEM 20-2 (Continued) (c) Financial Statements2011 Income Statement Pension expense .............................................. Comprehensive Income Statement Net Income ........................................................ $ XXXX Other comprehensive income (loss) Asset gain (loss)............................................... $ (2,560) Liability gain (loss) ........................................... 16,630 (55,670) Prior service cost amortization ....................... 41,600 Comprehensive income........................................... $ XXXX Balance Sheet Liabilities Pension liability ............................................ Stockholders equity Accumulated other comprehensive loss (PSC) ...................................................... Accumulated other comprehensive income (G/L) ..................................................
$ 89,370
$203,400
$ 64,000 12,070
20-46
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Kieso, Intermediate Accounting, 13/e, Solutions Manual
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PROBLEM 20-3
(a) Pension expense for 2010 comprises the following: Service cost ............................................................ Interest on projected benefit obligation (10% X $380,000) ................................................ Actual return on plan assets ................................. Unexpected loss ..................................................... Amortization of gain or loss in 2010 ..................... Amortization of prior service cost ........................ ($150,000 10 years) .......................................... Pension expense ............................................ *([10% X $200,000] $11,000) (b) Journal Entries2010 Other Comprehensive Income (G/L) ..................... Pension Expense ................................................... Cash................................................................. Pension Asset /Liability .................................. Other Comprehensive Income (PSC) ............ *Computed in part (c) (c) 2010 Increase/Decrease in Gains/Losses (1) 12/31/10 new actuarially computed PBO Less: Projected benefit obligation per memo record: 1/1/10 PBO $380,000 Add interest (10% X $380,000) 38,000 Add service cost (given) 52,000 0 Less benefit payments Liability loss $490,000 29,000 85,000 65,000 34,000 15,000 $52,000 38,000 (11,000) (9,000)* 0 15,000 $85,000
470,000 $20,000
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20-47
PROBLEM 20-3 (Continued) (2) 12/31/10 fair value of plan assets Less: Expected fair value 1/1/10 fair value of plan assets Add expected return (10% X $200,000) Add pension plan contribution Less benefit payments Asset loss Net loss at 12/31/10 ($20,000 liability loss + $9,000) $276,000 $200,000 20,000 65,000 0 285,000 9,000 $29,000
The $29,000 net loss in the accumulated OCI (G/L) account becomes the beginning balance in 2011. The corridor at 1/1/11 is 10% of the greater of $490,000 (PBO) or $276,000 (market-related asset value). Since the corridor of $49,000 is greater than the balance in the accumulated OCI (G/L) account of $29,000, there will be no gain/loss amortization in 2011. It follows that no amortization occurs in 2010 because no balance existed in the accumulated OCI (G/L) account at the beginning of 2010. (d) Financial Statements2010 Income Statement Pension expense ............................................. Comprehensive Income Statement Net Income .............................................................. $ XXXX Other comprehensive income (loss) Asset gain (loss).............................................. $ (9,000) Liability gain (loss) .......................................... (20,000) Prior service cost amortization ...................... 15,000 (14,000) Comprehensive income.......................................... $ XXXX Balance Sheet Liabilities Pension asset /liability.......................... Stockholders equity Accumulated other comprehensive loss (PSC) ......................................... Accumulated other comprehensive loss .......................... *($380,000 $200,000) + $34,000 **($150,000 $15,000)
20-48
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$ 85,000
$214,000*
$135,000** $ 29,000
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
PROBLEM 20-3 (Continued)
General Journal Entries
Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost Actual return Unexpected loss Liability Loss Contributions PSC Amortization Journal entry for 2011 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 52,000 Dr. 38,000 Dr. 11,000 Cr. 9,000 Cr. 65,000 15,000 85,000 65,000 15,000 Cr. 15,000 Cr. 150,000 Dr. 135,000 Dr. 29,000 Dr. 0 29,000 Dr. 34,000 Cr. 214,000 Cr. OCIPrior Service Cost OCI Gain/Loss
Memo Record
Projected Pension Benefit Asset/Liability Obligation 180,000 Cr. 380,000 Cr. 52,000 Cr. 38,000 Cr. Plan Assets 200,000 Dr.
Cash
11,000 Dr. 9,000 Dr. 20,000 Dr. 20,000 Cr. 65,000 Dr.
490,000 Cr.
276,000 Dr.
20-49
PROBLEM 20-4
(a) Computation of pension expense: 2010 Service cost ...................................................... ($ 60,000 Interest cost ($700,000 X .09) and ($800,000 X .09) ..................................... 63,000 Expected return on plan assets....................... (24,000) Amortization of prior service cost................... 10,000 Pension expense .............................................. ($109,000 (b) Pension Asset/Liability .................................... Pension Expense .............................................. Other Comprehensive Income (PSC) ........ Other Comprehensive Income (G/L) .......... Cash............................................................. Pension Expense .............................................. Cash ............................................................. Pension Asset / Liability .............................. Other Comprehensive Income (PSC) ........ 2011 $ 90,000 72,000 (30,000) 12,000 ($144,000
2010 (39,000 109,000 10,000 23,000 (115,000 2011 144,000 120,000 12,000 12,000
Note to instructors: Although not required, students could be encouraged to prepare a 2-year pension worksheet, as shown on the following page.
20-50
Copyright 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
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PROBLEM 20-4 (Continued)
General Journal Entries
Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost* Actual return Unexpected loss Amortization of PSC Contributions Increase in PBO Journal entry for 2010 Accumulated OCI, Jan. 1, 2010 Balance, Dec. 31, 2010 60,000 Dr. 63,000 Dr. 24,000 Cr. 10,000 Dr. 115,000 Cr. 109,000 Dr. 115,000 Cr. 10,000 Cr. 250,000 Dr. 240,000 Dr. 23,000 Cr. 23,000 Cr. 0 23,000 Cr. 10,000 Cr. Cash OCIPrior Service Cost OCI Gain/Loss
Memo Record
Projected Pension Benefit Asset/Liability Obligation 140,000 Cr. 700,000 Cr. 60,000 Cr. 63,000 Cr. Plan Assets 560,000 Dr.
*
24,000 Dr.
115,000 Dr. 23,000 Dr.** 39,000 Dr. 101,000 Cr. 800,000 Cr. 90,000 Cr. 72,000 Cr. 30,000 Dr. 699,000 Dr.
Service cost 90,000 Dr. Interest cost* 72,000 Dr. Actual return 30,000 Cr. Unexpected gain Amortization of PSC 12,000 Dr. 12,000 Cr. Amortization of loss Contributions 120,000 Cr. Journal entry for 2011 144,000 Dr. 120,000 Cr. 12,000 Cr. Accumulated OCI, Dec. 31, 2010 240,000 Dr. Balance, Dec. 31, 2011 228,000 Dr. *($700,000 $140,000) **($700,000 + $60,000 + $63,000) $800,000
120,000 Dr. 0 23,000 Cr. 23,000 Cr. 12,000 Cr. 113,000 Cr. 962,000 Cr. 849,000 Dr.
20-2
PROBLEM 20-5
(a) Pension expense for 2010 consisted only of the service cost component amounting to $60,000. There were no prior service cost, net gain or loss, plan assets, or projected benefit obligation as of January 1, 2010. Pension expense for 2011 comprised the following: Service cost..................................................................... Interest on projected benefit obligation ($60,000 X 11%) ........................................................... Expected return on plan assets ($50,000 X 10%) ........................................................... Amortization of net gain or loss .................................... Amortization of prior service cost ................................. Pension expense ..................................................... Pension expense for 2012 comprised the following: Service cost..................................................................... Interest on projected benefit obligation ($200,000 X 8%) ........................................................... Expected return on plan assets ($85,000 X 10%) ........................................................... Amortization of net gain or loss (1) ............................... Amortization of prior service cost ................................. Pension expense ..................................................... $119,000 16,000 (8,500) 4,867 0 $131,367 $85,000 6,600 (5,000) 0 0 $86,600
20-52
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PROBLEM 20-5 (Continued)
(1) Year 2010 2011 2012 Projected Plan Assets Benefit Obligation (a) (a) $ 0 60,000 200,000 $ 0 50,000 85,000 Minimum Amortization of (Gain) Loss $( 0 0 4,867 (c)
Corridor (b) $ 0 6,000 20,000
Accumulated OCI (G/L) (a) $( 0 0 78,400
(a) As of the beginning of the year. (b) The corridor is 10 percent of the greater of the projected benefit obligation or plan assets. (c) $78,400 $20,000 = $58,400; $58,400/12 = $4,867
(b)
Journal Entries2010 Pension Expense ..................................................... Cash................................................................... Pension Asset /Liability .................................... Journal Entries2011 Pension Expense ..................................................... Other Comprehensive Income (G/L) ....................... Cash................................................................... Pension Asset /Liability .................................... Journal Entries2012 Pension Expense ...................................................... Other Comprehensive Income (G/L) ........................ Cash.................................................................... Pension Asset /Liability .....................................
60,000 50,000 10,000
86,600 78,400 60,000 105,000
131,367 2,633* 105,000 29,000
*Note: The debit to Other Comprehensive Income (G/L) is a plug figure. It equals the corridor amortization credit ($4,867) netted against an additional loss in 2012 of $7,500. Note to instructors: Although not required, students could be encouraged to prepare a 3-year worksheet, as presented on the following page.
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20-2
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PROBLEM 20-5 (Continued)
General Journal Entries Annual Pension OCI Pension Expense Cash Gain/Loss Asset/Liability Balance, Jan. 1, 2010 Service cost Interest cost Expected return Contributions Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Service cost Interest cost Actual return Contributions Increase in liability Benefits Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011 60,000 Dr.
Memo Record Projected Plan Benefit Obligation Assets 60,000 Cr.
50,000 Cr. 60,000 Dr. 50,000 Cr.
50,000 Dr. 10,000 Cr. 10,000 Cr. 60,000 Cr. 85,000 Cr. 6,600 Cr. 50,000 Dr.
85,000 Dr. 6,600 Dr. 5,000 Cr. 60,000 Cr. 78,400 Dr. 86,600 Dr. 60,000 Cr. 78,400 Dr. 0 78,400 Dr. 105,000 Cr. 115,000 Cr.
5,000 Dr. 60,000 Dr. 78,400 Cr. 30,000 Dr. 30,000 Cr.
200,000 Cr. 119,000 Cr. 16,000 Cr.
85,000 Dr.
Service cost 119,000 Dr. Interest cost 16,000 Dr. Expected return 8,500 Cr. Amortization of loss 4,867 Dr. Contributions 105,000 Cr. Benefits Liability loss* Journal entry for 2012 131,367 Dr. 105,000 Cr. Accumulated OCI, Dec. 31, 2011 Balance, Dec. 31, 2012 *$324,000 ($200,000 + $119,000 + $16,000 $18,500).
8,500 Dr. 4,867 Cr. 18,500 Dr. 7,500 Cr. 29,000 Cr. 144,000 Cr. 324,000 Cr. 180,000 Dr. 105,000 Dr. 18,500 Cr.
7,500 Dr. 2,633 Dr. 78,400 Dr. 81,033 Dr.
PROBLEM 20-6
(a) Prior Service Cost Amortization 2010 2011 2012 $166,667 166,667 166,667 ($2,000,000 12 years) ($2,000,000 12 years) ($2,000,000 12 years)
(b) Pension expense for 2010 comprised the following: Service cost ....................................................................... Interest on projected benefit obligation* ......................... Actual return on plan assets** ......................................... Unexpected gain*** ........................................................... Amortization of prior service cost ................................... Pension expense ....................................................... $200,000 500,000 (325,000) 25,000 166,667 $566,667
***($5,000,000 X 10% = $500,000) ***[$4,100,000 $3,000,000 ($775,000 $0)] ***(Expected return of $300,000 actual return of $325,000 = $25,000 unexpected gain) (c) Pension liability, beginning of year ................................. Pension liability, end of year ............................................ Decrease in liability ................................................... *$4,850,000 $4,100,000 Journal Entries2010 Pension Expense .................................................. 566,667 Pension Asset /Liability ......................................... 1,250,000 Other Comprehensive Income (G/L) ............. Other Comprehensive Income (PSC) ........... Cash................................................................ $2,000,000 750,000* $1,250,000
875,000 166,667 775,000
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20-55
PROBLEM 20-6 (Continued) (d) 12/31/10 Fair value of plan assets Less: Expected fair value of assets 1/1/10 fair value of plan assets Add expected return (10% X $3,000,000) Add contributions to the plan Less benefits Asset gain 12/31/10 Actuarially computed PBO Less: 1/1/10 PBO $5,000,000 Add interest (10% X $5,000,000) 500,000 Add service cost 200,000 0 Less benefits Liability gain Net gain 12/31/10 $4,100,000 $3,000,000 300,000 775,000 0 4,850,000
4,075,000 (25,000)
5,700,000 (850,000) $ (875,000)
Amortization in 2010: None because there was no beginning balance. Amortization in 2011 (corridor approach): $32,500, as shown below.
Year 2010 2011 Projected Benefit Fair Value Obligation of Plan Assets Corridor $5,000,000 4,850,000 $3,000,000 4,100,000 $500,000 485,000 Accumulated OCI (G/L) Amortization $( 0 (875,000) *$ 0 *32,500*
*$875,000 $485,000 = $390,000; $390,000 12 = $32,500
20-56
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PROBLEM 20-6 (Continued)
General Journal Entries
Annual Pension Expense Balance, Jan. 1, 2010 Service cost Interest cost* Actual return Unexpected gain Amortization of PSC Contributions Decrease in PBO Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 *$5,000,000 X 10% 200,000 Dr. 500,000 Dr. 325,000 Cr. 25,000 Dr. 166,667 Dr. 775,000 Cr. 850,000 Cr. 566,667 Dr. 775,000 Cr. 166,667 Cr. 875,000 Cr. 2,000,000 Dr. 0 1,833,333 Cr. 875,000 Cr. Cash OCIPrior Service Cost
Memo Record
Projected OCI Pension Benefit Gain/Loss Asset/Liability Obligation Plan Assets
2,000,000 Cr. 5,000,000 Cr. 3,000,000 Dr. 200,000 Cr. 500,000 Cr. 325,000 Dr. 25,000 Cr. 166,667 Cr. 775,000 Dr. 850,000 Dr. 1,250,000 Dr. 750,000 Cr. 4,850,000 Cr. 4,100,000 Dr.
20-57
20-2
Items
Annual Pension Expense
HANSON CORP. Pension Worksheet2010 General Journal Entries Memo Record OCIPrior Projected Service OCI Penison Benefit Plan Cash Cost Gain/Loss Asset/Liability Obligation Assets 180,000 Cr. 700,000 Cr. 520,000 Dr. 108,000 Cr. 63,000 Cr. 48,000 Dr.
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
Balance, Jan. 1, 2010 Service cost 108,000 Dr. Interest cost* 63,000 Dr. Actual return 48,000 Cr. Unexpected loss** 4,000 Cr. 4,000 Dr. Amortization of PSC 25,000 Dr. 25,000 Cr. Amortization of loss*** 2,100 Dr. 2,100 Cr. Contributions 133,000 Cr. Benefits Journal entry for 2010 146,100 Dr. 133,000 Cr. 25,000 Cr. 1,900 Dr. Accumulated OCI, Dec. 31, 2009 81,000 Dr. 91,000 Dr. Balance, Dec. 31, 2010 56,000 Dr. 92,900 Dr. *$63,000 = $700,000 X .09. **$4,000 = ($520,000 X .10) $48,000. *** Year 2010 1/1 Projected Benefit Obligation $700,000
PROBLEM 20-7
133,000 Dr. 85,000 Dr. 85,000 Cr. 10,000 Dr. 170,000 Cr. 786,000 Cr. 616,000 Dr.
Value of 1/1 Plan Assets $520,000
10% Corridor $70,000
Accumulated OCI (G/L), 1/1 $91,000
Minimum Amortization of Loss for 2010 *$2,100****
****$91,000 $70,000 = $21,000; $21,000 10 = $2,100.
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
(a)
Items
LEMKE COMPANY Pension Worksheet2010 and 2011 General Journal Entries Annual OCIPrior Pension Service OCI Expense Cash Cost Gain/Loss
Pension Asset/ Liability
Memo Record Projected Benefit Obligation Plan Assets 410,000 Dr.
Balance, Jan. 1, 2010 Service cost 40,000 Dr. (a) Interest cost 60,000 Dr. Actual return 36,000 Cr. (b) Unexpected loss 5,000 Cr. Amortization of PSC 70,000 Dr. Contributions Benefits Increase in PBO Journal entry for 2010 129,000 Dr. Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Service cost 59,000 Dr. (c) Interest cost 75,550 Dr. Actual return 61,000 Cr. (d) Unexpected gain 9,850 Dr. Amortization of PSC 50,000 Dr. (e) Amortization of Loss 823 Dr. Contributions Benefits Journal entry for 2011 134,223 Dr. Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
190,000 Cr. 600,000 Cr. 40,000 Cr. 60,000 Cr. 5,000 Dr.
36,000 Dr.
PROBLEM 20-8
70,000 Cr. 97,000 Cr. 87,000 Dr. 92,000 Dr. 0 92,000 Dr. 31,500 Dr. 87,000 Cr. 54,000 Cr. 244,000 Cr. 755,500 Cr. 59,000 Cr. 75,550 Cr. 511,500 Dr. 97,000 Dr. 31,500 Cr.
97,000 Cr.
70,000 Cr. 160,000 Dr. 90,000 Dr.
61,000 Dr. 9,850 Cr. 50,000 Cr. 823 Cr. 81,000 Cr. 54,000 Dr. 81,000 Cr. 50,000 Cr. 90,000 Dr. 40,000 Dr. 10,673 Cr. 92,000 Dr. 81,327 Dr. 7,450 Dr. 236,550 Cr. 836,050 Cr. 599,500 Dr. 81,000 Dr. 54,000 Cr.
20-59
PROBLEM 20-8 (Continued) Worksheet computations:
(a)
$60,000 = $600,000 X 10%. $5,000 = ($410,000 X 10%) $36,000; expected return exceeds actual return. $75,550 = $755,500 X 10%. $9,850 = ($511,500 X 10%) $61,000; actual return exceeds expected return. $92,000 75,550 $16,450 $ 823
(b)
(c)
(d) (e)
2011 Corridor Test: Accumulated net (gain) or loss at beginning of year ................. 10% of larger of PBO or fair value of plan assets ...................... Amortizable amount ..................................................................... 2011 amortization ($16,450 20 years) .......................................
(b)
2010 Pension Expense ...................................................... Other Comprehensive Income (G/L) ........................ Cash ................................................................... Pension Asset /Liability ..................................... Other Comprehensive Income (PSC) ............... 2011 Pension Asset /Liability ............................................ Pension Expense ...................................................... Cash ................................................................... Other Comprehensive Income (PSC) ............... Other Comprehensive Income (G/L) ................
129,000 92,000 97,000 54,000 70,000 7,450 134,223 81,000 50,000 10,673
20-60
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PROBLEM 20-8 (Continued) (c) Financial Statements2011 Income Statement Pension expense ............................................ Comprehensive Income Statement Net Income .............................................................. Other comprehensive income (loss) Asset gain (loss) ............................................ Amortization of loss ...................................... Prior Service cost amortization .................... Comprehensive income Balance Sheet Liabilities Pension liability ....................................... Stockholders equity Accumulated other comprehensive loss (PSC) ............................................ Accumulated other comprehensive loss (G/L) ................................................ $ XXXX $9,850 823 50,000 $134,223
60,673 $ XXXX
$236,550
$ 40,000 81,327
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20-61
PROBLEM 20-9
(a) See worksheet on next page. (b) December 31, 2010 Other Comprehensive Income (G/L) ..................... Pension Expense ................................................... Cash ................................................................ Pension Asset /Liability .................................. (c) See worksheet on next page. The entry is below. December 31, 2011 Other Comprehensive Income (PSC) ................... Other Comprehensive Income (G/L) ..................... Pension Expense ................................................... Cash ................................................................ Pension Asset/Liability .................................. (d) Financial Statements2011 Income Statement Pension expense ............................................ Balance Sheet Liabilities Pension liability ....................................... Stockholders equity Accumulated other comprehensive loss (PSC) .............................................. Accumulated other comprehensive loss (G/L) ............................................... $432,440 510,000 36,560 432,440 184,658 794,342 24,000 334,000 200,000 158,000
$952,342
$510,000 60,560
20-62
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PROBLEM 20-9 (Continued)
(a)
HOBBS COMPANY Pension Worksheet2010 and 2011 General Journal Entries Annual Pension Expense 150,000 Dr. 460,000 Dr. 252,000 Cr. 24,000 Cr. 200,000 Cr. 220,000 Dr. 334,000 Dr. 200,000 Cr. 24,000 Dr. 0 24,000 Dr. 600,000 Dr. 170,000 Dr. 559,000 Dr. 350,000 Cr. 36,560 Cr. 90,000 Dr. 184,658 Cr. 280,000 Dr. 432,440 Dr. 184,658 Cr. 510,000 Dr. 0 510,000 Dr. 36,560 Dr. 24,000 Dr. 60,560 Dr. 794,342 Cr. 952,342 Cr. 6,039,000 Cr. 5,086,658 Dr. 158,000 Cr. 158,000 Cr. 4,990,000 Cr. 4,832,000 Dr. 600,000 Cr. 5,590,000 Cr. 170,000 Cr. 559,000 Cr. 350,000 Dr. OCIPrior OCI Pension Service Cost Gain/Loss Asset/Liability Memo Record Projected Benefit Plan Obligation Assets 4,600,000 Cr. 4,600,000 Dr. 150,000 Cr. 460,000 Cr. 252,000 Dr. 24,000 Dr. 200,000 Dr. 220,000 Cr.
Items
Balance, Jan. 1, 2010 Service cost (a) Interest cost Actual return (b) Unexpected loss Contributions Benefits Journal entry for 2010 Accumulated OCI Dec. 31, 2009 Balance, Dec. 31, 2010 Additional PSC, 1/1/2011 Balance, Jan. 1, 2011 Service cost (c) Interest cost Actual return (d) Unexpected loss Amortization of PSC Contributions Benefits Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
(a) (b)
Cash
36,560 Dr. 90,000 Cr. 184,658 Dr. 280,000 Cr.
$460,000 = $4,600,000 X 10%. $24,000 = ($4,600,000 X 6%) $252,000. (c) $559,000 = ($4,990,000 + $600,000) X 10%. (d) $36,560 = ($4,832,000 X .08) $350,000.
20-2
20-2
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
(a)
Completed Worksheet2010 Annual Pension Expense
KRAMER COMPANY General Journal Entries Memo Record OCIPrior Projected Service OCI Pension Benefit Plan Cash Cost Gain/Loss Asset/Liability Obligation Assets 120,000 Cr. 325,000 Cr. 205,000 Dr. 20,000 Cr. 26,000 Cr. 18,000 Dr. 2,500 Dr. 35,000 Cr. 41,000 Cr. 43,500 Dr. 60,500 Dr. 41,000 Cr. 35,000 Cr. 46,000 Dr. 80,000 Dr. 0 45,000 Dr. 46,000 Dr. 41,000 Dr. 15,000 Dr. 15,000 Cr. 43,500 Cr. 30,500 Cr. 150,500 Cr. 399,500 Cr. 249,000 Dr.
Balance, Jan. 1, 2010 Service cost Interest cost Actual return Unexpected loss Amortization of PSC Contributions Benefits Increase in PBO Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 (b)
20,000 Dr. 26,000 Dr. 18,000 Cr. 2,500 Cr. 35,000 Dr.
PROBLEM 20-10
2010 Pension Expense .............................................................................. Other Comprehensive Income (G/L) ................................................ Cash ....................................................................................... Pension Asset/Liability ......................................................... Other Comprehensive Income (PSC) ................................... 1. 2. Settlement Rate: $26,000 $325,000 = 8% Expected return on assets: ($18,000 + $2,500) $205,000 = 10%
60,500 46,000 41,000 30,500 35,000
(c)
Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)
(a)
Completed Worksheet2011 Annual Pension Expense
KRAMER COMPANY General Journal Entries Memo Record OCIPrior Projected Service OCI Penison Benefit Plan Cash Cost Gain/Loss Asset/Liability Obligation Assets 150,500 Cr. 399,500 Cr. 249,000 Dr. 59,000 Cr. 39,950 Cr. 32,000 Dr.
Balance, Jan. 1, 2011 Service cost 59,000 Dr. Interest cost 39,950 Dr. Actual return 32,000 Cr. Unexpected gain 7,100 Dr. 7,100 Cr. Amortization of PSC 28,000 Dr. 28,000 Cr. Amortization of loss 242 Dr. 242 Cr. Contributions 51,000 Cr. Benefits Journal entry for 2011 102,292 Dr. 51,000 Cr. 28,000 Cr. 7,342 Cr. Accumulated OCI, Dec. 31, 2010 45,000 Dr. 46,000 Dr. Balance, Dec. 31, 2011 17,000 Dr. 38,658 Dr.
PROBLEM 20-11
51,000 Dr. 27,000 Dr. 27,000 Cr. 15,950 Cr. 166,450 Cr. 471,450 Cr. 305,000 Dr.
20-2
PROBLEM 20-11 (Continued) Worksheet computations: Interest cost: $39,950 = $399,500 X 10% Unexpected gain: $7,100 = ($249,000 X 10%) $32,000; actual return exceeds expected return. 2011 Corridor Test: Accumulated net (gain) or loss at beginning of year ... 10% of larger of PBO or fair value of plan assets ..... Amortizable amount .................................................... 2011 amortization ($6,050 25 years)........................ (b) 2011 Pension Expense ........................................................ 102,292 Pension Asset/Liability ........................................ Other Comprehensive Income (PSC).................. Other Comprehensive Income (G/L) ................... Cash ...................................................................... $46,000 39,950 $ 6,050 $ 242
15,950 28,000 7,342 51,000
(c) Financial Statements2011 Income Statement Pension expense..................................................
$102,292
Comprehensive Income Statement Net Income................................................................... $ XXXX Other comprehensive income (loss) Asset gain (loss) .................................................. 7,100 Amortization of loss ............................................ 242 35,342 Prior service cost amortization ........................... 28,000 Comprehensive income ............................................... $ XXXX Balance Sheet Liabilities Pension liability ...................................................... Stockholders equity Accumulated other comprehensive loss (PSC) ... Accumulated other comprehensive loss (G/L) .....
$166,450 $ 17,000 38,658
20-66
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(a)
LARSON CORP. Pension Worksheet2011 General Journal Entries Memo Record Annual OCIPrior Projected Service Pension OCI Penison Benefit Plan Expense Cash Cost Gain/Loss Asset/Liability Obligation Assets 45,000 Dr. 23,800 Dr. 27,000 Cr. 5,400 Dr. 12,000 Dr. 500 Dr. 65,000 Cr. 59,700 Dr. 65,000 Cr. 12,000 Cr. 5,900 Cr. 90,000 Dr. 39,000 Dr. 78,000 Dr. 33,100 Dr. 23,200 Dr. 46,800 Cr. 367,800 Cr. 321,000 Dr. 70,000 Cr. 340,000 Cr. 270,000 Dr. 45,000 Cr. 23,800 Cr. 27,000 Dr.
Balance, Jan. 1, 2011 Service cost Interest cost* Actual return Unexpected gain** Amortization of PSC Amortization of loss*** Contributions Benefits Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
PROBLEM 20-12
5,400 Cr. 12,000 Cr. 500 Cr. 65,000 Dr. 41,000 Dr. 41,000 Cr.
*$23,800 = $340,000 X .07. **$5,400 = ($270,000 X .08) $27,000. *** Year 1/1 Projected Benefit Obligation Minimum Amortization of Loss for 2011 *$500****
Value of 1/1 Plan Assets
10% Corridor $34,000
Accumulated OCI (G/L), 1/1 $39,000
2011 $340,000 $270,000 ****($39,000 $34,000) = $5,000 10 = $500.
20-2
PROBLEM 20-12 (Continued) (b) 2011 Pension Expense ..................................................... Pension Asset/Liability ............................................ Other Comprehensive Income (PSC)............... Other Comprehensive Income (G/L) ................ Cash ................................................................... 59,700 23,200 12,000 5,900 65,000
(c) Financial Statements2011 Income Statement Pension expense............................................... Comprehensive Income Statement Net Income................................................................ Other comprehensive income (loss) Asset gain (loss) ............................................... Amortization of loss ......................................... Prior Service cost amortization ....................... Comprehensive income ...........................................
$59,700 $ XXXX 5,400 500 12,000
17,900 $ XXXX
Balance Sheet Liabilities Pension liability ...................................................... Stockholders equity Accumulated other comprehensive loss (PSC) ... Accumulated other comprehensive loss (G/L) .....
$46,800 $78,000 33,100
20-68
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(a)
Items Balance, Jan. 1, 2010 Service cost Interest cost* Actual return Unexpected gain** Contributions Benefits Journal entry, for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 *$200,000 X .10 = $20,000 **$15,000 $10,000 = $5,000
HOLLENBECK FOODS INC. Postretirement Benefit Worksheet2010 General Journal Entries Annual Postretirement OCIGain/ Postretirement Expense Cash Loss Asset/Liability 70,000 Dr. 20,000 Dr. 15,000 Cr. 5,000 Dr. 65,000 Cr. 80,000 Dr. 65,000 Cr.
Memo Record APBO Plan Assets 200,000 Cr. 200,000 Dr. 70,000 Cr. 20,000 Cr. 15,000 Dr. 44,000 Dr. 65,000 Dr. 44,000 Cr.
5,000 Cr. 5,000 Cr. 0 5,000 Cr. 10,000 Cr. 10,000 Cr. 246,000 Cr. 236,000 Dr.
*PROBLEM 20-13
(b) Journal Entry Postretirement Expense ................................................. Other Comprehensive Income (G/L) ....................... Postretirement Asset/Liability................................. Cash .......................................................................... Financial Statements Income Statement Postretirement expense .................................................. Comprehensive Income Net income ........................................................................... Asset gain (loss) ............................................................. Comprehensive income ...................................................... Balance Sheet Liabilities Postretirement asset/liability ................................... Stockholders Equity Accumulated other comprehensive income ...........
80,000 5,000 10,000 65,000
$80,000 $XXXX 5,000 $XXXX
$10,000 $ 5,000
20-2
*PROBLEM 20-14
(a) See worksheet on next page. (b) December 31, 2010 Postretirement Expense ..................................... Other Comprehensive Income (G/L) .................. Cash .............................................................. Postretirement Asset/Liability..................... 120,000 40,000 45,000 115,000
(c) See worksheet on next page. The entry is below. December 31, 2011 Other Comprehensive Income (PSC) ................. Other Comprehensive Income (G/L) .................. Postretirement Expense ..................................... Cash .............................................................. Postretirement Asset/Liability..................... (d) Financial Statements2011 Income Statement Postretirement expense .............................. Comprehensive Income Statement Net Income........................................................... Other comprehensive income (loss) Asset gain (loss) .......................................... Plan amendment (PSC)................................ Prior service cost amortization ................... Comprehensive income ...................................... 163,000 23,700 221,800 35,000 373,500
$221,800 $ $ (23,700) (175,000) 12,000 XXXX
(186,700) $ XXXX
Balance Sheet Liabilities Postretirement liability ........................................... Stockholders equity Accumulated other comprehensive loss (PSC) ... Accumulated other comprehensive loss (G/L) .....
$488,500 $163,000 63,700
20-70
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*PROBLEM 20-14 (Continued)
Annual Expense Balance, Jan. 1, 2010 Service cost a Interest cost Actual return b Unexpected loss Contributions Benefits Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 Additional PSC, 1/1/2011 Balance, Jan. 1, 2011 Service cost c Interest cost Actual return d Unexpected loss Amortization of PSC Contributions Benefits Journal entry for 2011 Accumulated OCI, Dec. 31, 2010 Balance, Dec. 31, 2011
a b
General Journal Entries OCIPrior OCI Postretirement Cash Service Cost Gain/Loss Asset/Liability 0
Memo Record Plan APBO Assets 2,250,000 Cr. 2,250,000 Dr. 75,000 Cr. 225,000 Cr. 140,000 Dr. 45,000 Dr. 40,000 Cr.
75,000 Dr. 225,000 Dr. 140,000 Cr. 40,000 Cr. 45,000 Cr.
40,000 Dr. 40,000 Dr.
120,000 Dr.
45,000 Cr.
0 0 175,000 Dr.
40,000 Dr. 0 40,000 Dr.
115,000 Cr. 115,000 Cr. 2,510,000 Cr. 2,395,000 Dr. 175,000 Cr. 2,685,000 Cr. 85,000 Cr. 268,500 Cr. 120,000 Dr.
85,000 Dr. 268,500 Dr. 120,000 Cr. 23,700 Cr. 12,000 Dr. 35,000 Cr.
23,700 Dr. 12,000 Cr. 45,000 Dr. 35,000 Dr. 45,000 Cr.
221,800 Dr.
35,000 Cr.
163,000 Dr. 0 163,000 Dr.
23,700 Dr. 40,000 Dr. 63,700 Dr.
373,500 Cr. 488,500 Cr. 2,993,500 Cr. 2,505,000 Dr.
$2,250,000 X 10% ($2,250,000 X 8%) $140,000. c $2,685,000 X 10% d ($2,395,000 X 6%) $120,000.
20-2
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 20-1 (Time 3035 minutes) Purposeto provide the student with the opportunity to discuss some of the more traditional issues related to pension reporting. Specifically, the student is asked to define a pension plan, distinguish between a funded and unfunded plan, differentiate between accounting for the employer and the pension fund. In addition, justification for accrual accounting must be developed, as well as a determination of the relative objectivity of the accrual versus the cash basis. CA 20-2 (Time 2530 minutes) Purposeto provide the student with the opportunity to discuss the terminology employed in GAAP related to pension accounting. CA 20-3 (Time 2025 minutes) Purposeto provide the student with the opportunity to discuss the reasons why accrual accounting is followed for pension reporting. In addition, certain terms are required to be explained and the proper footnote disclosures identified. CA 20-4 (Time 3035 minutes) Purposeto provide the student with the opportunity to study some of the implications of GAAP as it related to pensions. The student is required to identify the five components of pension expense, the major differences between the accumulated benefit obligation and the projected benefit obligation, and how to report actuarial gains and losses. CA 20-5 (Time 5060 minutes) Purposeto provide the student with the opportunity to discuss the implications of GAAP given a number of different factual situations related to pensions. This case is quite thought-provoking and should stimulate a great deal of class discussion. CA 20-6 (Time 3040 minutes) Purposeto provide the student with the opportunity to explain gains and losses, including the use of corridor amortization. CA 20-7 (Time 2030 minutes) Purposeto provide the student with the opportunity to consider the ethical implications of the impact of pension benefits and their impact on financial statements.
20-72
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SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 20-1
(a) A private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the companys practices. In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost. (b) The employer is the organization sponsoring the pension plan. The employer incurs the costs and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements. The pension fund or plan is the entity which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients. Accounting for the fund involves identifying receipts as contributions from the employer sponsor and as income from fund investments and computing the amounts due to individual pension recipients. (c) 1. Relative to the pension fund the term funded refers to the relationship between pension fund assets and the present value of expected future pension benefit payments; thus, the pension fund may be fully funded or underfunded. Relative to the employer, the term funded refers to the relationship of the contributions made by the employer to the pension fund and the pension expense accrued by the employer; if the employer contributes annually to the pension fund an amount equal to the pension expense, the employer is fully funded. Relative to the pension fund, the pension liability is an actuarial concept representing an economic liability under the pension plan for future cash payments to retirees. From the viewpoint of the employer, the pension liability is an accounting credit that results from an excess of amounts expensed over amounts contributed (funded) to the pension fund. The theoretical justification for accrual recognition of pension costs is based on the matching concept. Pension costs are incurred during the period over which an employee renders services to the enterprise; these costs may be paid upon the employees retirement, over a period of time after retirement, as incurred through funding or insurance plans, or through some combination of any or all of these methods. Although cash (pay-as-you-go) accounting is highly objective for the final determination of actual pension costs, it provides no measurement of annual pension costs as they are incurred. Accrual accounting provides greater objectivity in the annual measurement of pension costs than does cash accounting if actuarial funding methods are applied to actuarial valuations to determine the provision for pension costs. While cash accounting provides a more precise determination of the final cost, accrual accounting provides a more objective measure of the annual cost.
2.
(d)
1.
2.
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CA 20-1 (Continued)
(e) Terms and their definitions as they apply to accounting for pension plans follow: 1. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to employee service during that period. The service cost component is a portion of the projected benefit obligation and is unaffected by the funded status of the plan. Prior service costs are the retroactive benefits granted in a plan amendment (or initiation). Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment. Vested benefits are benefits that are not contingent on the employee continuing in the service of the employer. In some plans the payment of the benefits will begin only when the employee reaches the normal retirement date; in other plans the payment of the benefits will begin when the employee retires (which may be before or after the normal retirement date). The actuarially computed value of vested benefits represents the present value: (a) the benefits expected to become payable to former employees who have retired, or who have terminated service with vested rights, at the date of determination; and (b) the benefits (based on service rendered prior to the date of determination) expected to become payable at future dates to present employees, taking into account the probable time that employees will retire.
2.
3.
CA 20-2
1. Pension asset/liability in the asset section is the excess of the fair value of pension plan assets over the projected benefit obligation. Pension asset/liability in the liability section is the excess of the projected benefit obligation over the fair value of the pension plan assets. Accumulated OCIPSC arises when an additional liability is recognized in the PBO due to prior service cost. This account should be reported in the stockholders equity section as a component of accumulated other comprehensive income. In addition, it should be shown as part of other comprehensive income. Pension expense is the amount recognized in an employers financial statements as the expense for a pension plan for the period. Components of pension expense are service cost, interest cost, expected return on plan assets, amortization of gain or loss, and amortization of prior service cost. It should be noted that GAAP uses the term net periodic pension cost instead of pension expense because part of the cost recognized in a period may be capitalized along with other costs as part of an asset such as inventory.
2.
3.
4.
20-74
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CA 20-3
(a) 1. The theoretical justification for accrual recognition of pension costs is based on the matching concept. Pension costs are incurred during the period over which an employee renders services to the enterprise; these costs may be paid upon the employees retirement, over a period of time after retirement, as incurred through funding or insurance plans, or through some combination of any or all of these methods. Although cash (pay-as-you-go) accounting is highly objective for the final determination of actual pension costs, it provides no measurement of annual pension costs as they are incurred. Accrual accounting provides greater objectivity in the annual measurement of pension costs than does cash accounting.
2.
(b)
Terms and their definitions as they apply to accounting for pensions follow: 1. Market-related asset value, when based on a calculated value, is a moving average of pension plan asset values over a period of time. Considerable flexibility is permitted in computing this amount. In many cases, companies will undoubtedly use the actuarial asset value employed by the actuary as their market-related asset value for purposes of applying this concept to pension reporting. The projected benefit obligation is the present value of vested and nonvested employee benefits accrued to date based on employees future salary levels. This is the pension liability required by GAAP. The corridor approach was developed by the FASB as the method for determining when to amortize the balance in the Accumulated OCI (G/L) account. The net gain or loss balance is amortized when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning-of-the-year balances of the projected benefit obligation or the market-related value of the plan assets.
2.
3.
(c)
The following disclosures about a companys pension plans should be made in financial statements or their notes: 1. A description of the plan including employee groups covered, type of benefit formula, funding policy, types of assets held, and the nature and effect of significant matters affecting comparability of information for all periods presented. The components of net periodic pension expense for the period. A reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period. Pension-related amounts recorded In Accumulated OCI and the impact of amortization of these items on pension expense in the current and next year. A table is required indicating the allocation of pension plan assets by category (equity securities, debt securities, real estate, and other assets), and showing the percentage of the fair value to total plan assets. In addition, a narrative description of investment policies and strategies, including the target allocation percentages (if used by the company), must be disclosed. The company must disclose the expected benefit payments to be paid to current plan participants for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter, based on the same assumptions used to measure the companys benefit obligation at the end of the year. Also required is disclosure of a companys best estimate of expected contributions to be paid to the plan during the next year.
2. 3. 4. 5.
6.
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CA 20-4
(a) Pension benefits are part of the compensation received by employees for their services. The actual payment of these benefits is deferred until after retirement. The net periodic pension expense measures this compensation and consists of the following five elements: 1. 2. The service cost component is the present value of the benefits earned by the employees during the current period. Since a pension represents a deferred compensation agreement, a liability is created when the plan is adopted. The interest cost component is the increase in that liability, the projected benefit obligation, due to the passage of time. In order to discharge the pension liability, an employer contributes to a pension fund. The return on the fund assets serves to reduce the interest element of the pension expense. Specifically, the expected return reduces pension expense. Expected return is the expected rate of return times the market-related value of plan assets. When a pension plan is adopted or amended, credit is often given for employee service rendered in prior years. This retroactive credit, or prior service cost, is charged to other comprehensive income (PSC) in the year the plan is adopted or amended, and then is recognized as pension expense over the time that the employees who benefited from this credit worked. The gains and losses component arises from a change in the amount of either the projected benefit obligation or the plan assets. This component is amortized via corridor amortization.
3.
4.
5. (b)
The major similarity between the accumulated benefit obligation and the projected benefit obligation is that they both represent the present value of the benefit attributed by the pension benefit formula to employee service rendered prior to a specific date. All things being equal, when an employee is about to retire, the accumulated benefit obligation and the projected benefit obligation would be the same. The major difference between the accumulated benefit obligation and the projected benefit obligation is that the former is based on present salary levels and the latter is based on estimated future salary levels. Assuming salary increases over time, the projected benefit obligation should be higher than the accumulated benefit obligation.
(c)
1.
Pension gains and losses, sometimes called actuarial gains and losses, result from changes in the value of the projected benefit obligation or the fair value of the plan assets. These changes arise from the deviations between the estimated conditions and the actual experience, and from changes in assumptions. The volatility of these gains and losses may reflect an unavoidable inability to predict compensation levels, length of employee service, mortality, retirement ages, and other relevant events accurately for a period, or several periods. Therefore, fully recognizing the gains or losses on the income statement may result in volatility that does not reflect actual changes in the funded status of the plan in that period. In order to decrease the volatility of the reporting of the pension gains or losses, the FASB had adopted what is referred to as the corridor approach. This approach achieves the objective by amortization of the accumulated OCI (G/L) in excess of 10% of the greater of the projected benefit obligation or the market-related asset value of the plan assets.
2.
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CA 20-5
1. This situation can exist because companies vary as to whether they are using an implicit or explicit set of assumptions when interest rates are disclosed. In the implicit approach, two or more assumptions do not individually represent the best estimate of the plans future experience with respect to these assumptions, but the aggregate effect of their combined use is presumed to be approximately the same as that of an explicit approach. In the explicit approach, each significant assumption reflecting the best estimate of the plans future experience solely with respect to that assumption must be stated. As a result, some companies are presently using an implicit approach, others an explicit approach. GAAP requires yet more consistency in discount rates. It requires companies to use rates on high quality fixed income investments currently available whose cash flows match the timing and amount of the expected benefit payments. As a result, this large variance in interest rates will probably disappear to some extent. However, it should be noted that companies will have some leeway in establishing settlement rates. In addition, the expected return on assets will also be different among companies. This situation will occur because the net funded position of the plan is required to be reported. That is, companies are required to report as a liability the excess of their projected benefit obligation over the fair value of plan assets. In the past, the basic liability companies reported was the excess of the amount expensed over the amount funded. This statement is questionable. If a financial measure purports to represent a phenomenon that is volatile, the measure must show that volatility or it will not be representationally faithful. Never-theless, many argue that volatility is inappropriate when dealing with such long-term measures as pensions. A good example of where dampening might be useful is the recognition of gains and losses. If assumptions prove to be accurate estimates of experience over a number of years, gains or losses in one year will be offset by losses or gains in subsequent periods, and amortization of gains and losses would be unnecessary. The main point is that volatility per se should not be considered undesirable when establishing accounting principles. Although some managements may consider volatility bad, this belief should not influence standard-setting. However, it is clear from some of the compromises made in GAAP that certain procedures were provided to dampen the volatility effect. (a) In a defined-contribution plan, the amount contributed is the amount expensed. No significant reporting problems exist here. On the other hand, defined benefit plans involve many difficult reporting issues which may lead to additional expense and liability recognition. Significant amendments will generally increase prior service cost which may lead to significant adjustments to pension expense in the future. (b) (c) Plan participants are of importance, because the expected future years of service com-putation can have an impact on the amortization of the prior service cost and gains and losses. If the plan is underfunded, pension expense will generally increase (all other factors constant). If the plan is overfunded, pension expense will generally decrease (all other factors constant). The reason is that the expected return on plan assets will be less if the plan is underfunded and vice versa. If the company is using an actuarial funding method different than the one prescribed in GAAP (benefits/years-of-service approach), some changes in the computation of pension expense will occur for the company.
2.
3.
4.
(d)
5.
The corridor method is an approach which requires that only gains and losses in excess of 10% of the greater of the projected benefit obligation or market related plan asset value be allocated. This excess is then amortized over the average remaining service period of current employees expected to participate in the plan. The corridors purpose is to only recognize gains and losses above a certain amount, on the theory that gains and losses within the corridor will offset one another over time.
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CA 20-6
To: From: Date: Subject: Vickie Plato, Accounting Clerk Good Student, Manager of Accounting January 3, 2013 Amortization of gains and losses in pension expense
Pension expense includes several components; one occasionally included is the amortization of cumulative gains/losses. These gains/losses occur for two reasons. First, the plan assets may provide a return that is either greater or less than what was expected. Second, changes in actuarial assumptions may create increases or decreases in the pension liability. If these gains/losses are small in relation to the projected benefit obligation (PBO) or the market related value of the Plan Assets (PA), then do not include them in annual pension expense. If, in any given year, the gains or losses become too great, then at least a portion must be included in pension expense so as not to understate or overstate the annual obligation. This is done through a process called amortization. To decide whether or not you should include gains/losses in annual pension expense, calculate 10 percent of either the PBO or the PA (whichever is greater) as a corridor. Amortize the amount of any gain or loss falling outside the corridor over the average remaining service life of the active employees. Note: these gains/losses must exist at the beginning of the year for which amortization takes place [see (a) on the schedule below]. Thus, in the attached schedule, no amortization of the $280,000 loss in 2009 was required because the balance in the gain/loss account at the beginning of that year was zero. However, at the beginning of 2010, the balance in that account was $280,000. The 10 percent corridor is $250,000, so the loss exceeds this corridor by $30,000. Since the remaining service life of employees is 10 years, you derive the amortized portion by dividing $30,000 by 10: $3,000 [see (b) on the schedule below]. Note that the unamortized portion of the gain/loss from the previous year is combined with the current gain/loss. Check this new sum against a newly calculated 10 percent corridor. If the sum exceeds this corridor, then amortize the excess. In the attached schedule, the unamortized loss from 2010 ($277,000) was added to the 2010 loss of $85,000, resulting in a cumulative loss of $362,000 (see (c) below). This amount exceeds the new corridor ($290,000) by $72,000. However, the remaining service life has been changed to 12 years, resulting in annual amortization of only $6,000 [see (d) below]. Finally, if the losses from 2011 are added to the unamortized portion of the loss from prior years, the sum ($368,000) falls within the 2012 corridor ($390,000) and does not need to be amortized at all. Corridor and Minimum Loss Amortization Schedule Projected Benefit Obligation (a) $2,200,000 2,400,000 2,900,000 3,900,000 Plan Assets Value (a) $1,900,000 2,500,000 2,600,000 3,000,000 Accumulated OCI (G/L) (a) $ 0 280,000 362,000 (c) 368,000 (e) Minimum Amortization of Loss $ 0 3,000 (b) 6,000 (d) 0
Year 2009 2010 2011 2012
10% Corridor $220,000 250,000 290,000 390,000
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CA 20-6 (Continued)
(a) (b) (c) (d) (e) As of the beginning of the year. ($280,000 $250,000) 10 years = $3,000 $280,000 $3,000 + $85,000 = $362,000 ($362,000 $290,000) 12 years = $6,000 $362,000 $6,000 + $12,000 = $368,000
CA 20-7
While Habbe may be correct in assuming that the termination of nonvested employees would decrease its pension-related liabilities and associated expenses, she is callous to suggest that firing employees is a reasonable approach to correcting the underfunding of College Electronixs pension plan. Arbitrarily dismissing productive employees on the basis of being vested or not vested in the pension plan in order to avoid capitalizing a liability and recognizing expenses is a capricious and unsound business decision. Gerald Ott should discuss the ethical, legal, and financial implications of the alternatives available as well as the accounting requirements relating to this situation. This obligation and its effect on the financial statements should have been known to Thinken Technology when it performed its due diligence audit of CE at the time of merger negotiations. Thinken Technology should capitalize the pension obligations of CE as required by GAAP.
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FINANCIAL REPORTING PROBLEM
(a) P&G offers various postretirement benefits to its employees. The most prevalent employee benefit plans offered are defined contribution plans, which cover substantially all employees in the U.S. Under the defined contribution plans, the company generally makes contributions to participants based on individual base salaries and years of service. The company maintains the Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. defined contribution plan, as well as other retiree benefits. Certain other employees, primarily outside the U.S., are covered by local defined benefit plans. (b) 2007 2006 2005 Pension expense Pension expense Pension expense $183,000,000 $374,000,000 $268,000,000
(c)
In 2007, P&G reports a $2,898,000,000 Accrued Pension Cost on its balance sheet. It reports $183,000,000 as pension expense on its income statement. It also reports a postretirement liability of $503,000,000. (See Note 4). P&G provides the following disclosure of its asset allocations for the pension fund and the fund for Other Retiree Benefits. Plan Assets. The Companys target asset allocation for the year ending June 30, 2008 and actual asset allocation by asset category as of June 30, 2007, are as follows: Target Asset Allocation Pension Benefits Other Retiree Benefits 2008 2008 57% 96% 41% 4% 2% % 100% 100%
(d)
Asset Category Equity securities Debt securities Real estate Total
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FINANCIAL REPORTING PROBLEM (Continued) Asset Allocation at June 30 Pension Benefits Other Retiree Benefits 2007 2007 56% 96% 39% 4% 3% % 2% % 100% 100%
Asset Category Equity securities Debt securities Cash Real estate Total
These allocations appear in-line with the expected return assumptions for these two funds: 2007 Assumptions used to determine net periodic cost Expected return on plan assets Pensions 7.2% Other Retiree 9.3%
As indicated, almost all of the assets in the Other Retiree Benefit fund are equity investments, which should earn higher (if not also riskier) returns than debt investments. The differences are consistent with the higher expected return assumption for Other Retiree Benefit funds. Thus, this information is useful to users of the financial statements in evaluating the pension plans exposure to market risk and possible cash flow demands on the company. In addition, it will help users to better understand and assess the reasonableness of the companys expected rate of return assumption.
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COMPARATIVE ANALYSIS CASE
(a) Coca-Cola sponsors and/or contributes to pension plans covering substantially all U.S. employees and certain employees in international locations. Coca-Cola also sponsors nonqualified, unfunded defined benefit plans for certain officers and other employees. PepsiCo sponsors noncontributory defined benefit pension plans cover-ing substantially all full-time U.S. employees and certain international employees. (b) Coca-Cola reported net periodic benefit cost of $108 million in 2007. PepsiCo reported pension expense of $329 million in 2007 for U.S. plans. (c) 2007 Funded Status ($millions) Coca-Cola PepsiCo Pensions ($ 89) ($266) OPEB ($ 192) ($1,354)
(d) Relevant rates used to compute pension information: Coca-Cola Discount rate (expense) Rate of increase in compensation levels Expected long-term rate of return on plan assets 5.5% 4.25% 7.75% PepsiCo 5.8% 4.7% 7.8%
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COMPARATIVE ANALYSIS CASE (Continued) (e) Coca-Cola and PepsiCo provide the following disclosures on expected contributions and benefit payments (amounts in millions): Coca-Cola Cash Flows Information about the expected cash flow for our pension and other postretirement benefit plans is as follows: Pension Benefits Expected employer contributions: 2008 Expected benefit payments: 2008 2009 2010 2011 2012 20132017 PepsiCo Future Benefit Payments Our estimated future benefit payments to beneficiaries are as follows: 2008 Pension Retiree medical $290 $ 95 2009 $315 $100 2010 $350 $105 2011 $385 $110 2012 $425 $115 2013 2017 $2,755 $ 640 $ 52 Other Benefits $ 1
185 168 179 177 185 1,083
32 34 37 40 42 208
These benefit payments to beneficiaries include payments made from both funded and unfunded pension plans. The above payments exclude any discretionary contributions we may make. We expect such contributions to be approximately $75 million in 2008. PepsiCo appears to have a much higher cash claim related to its postretirement benefit plans with expected benefit payments than CocaColas. Thus, these disclosures provide information related to the cash outflows of the company. With this information, financial statement users can better understand the potential cash outflows related to the pension plan. As a result, users can better assess the liquidity and solvency of the company, which helps in assessing the companys overall financial flexibility.
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20-83
FINANCIAL STATEMENT ANALYSIS CASE
(a) The components of postretirement expense are service cost, interest cost, return on plan assets, amortization of prior service cost, and gains and losses. The expense for these plans is reporting in income from operations. Similar to pensions, the net pension asset for the postemployment benefit plan will be reported in Peakes balance sheet, depending on whether there is a net debit or credit balance in the memorandum accounts related to the plan. The accounting for defined-benefit plans and OPEBs is very similar. For example, the measures of the obligation are similar and the components of expense and their calculation are the same (with similar smoothing mechanisms employed for both types of plans with respect to gains and losses.) There are, however, a number of differences between Postretirement Healthcare Benefits and Pensions: Item Funding Benefit Pensions Generally funded. Well-defined and level dollar amount. Beneficiary Retiree (maybe some benefit to surviving spouse). Benefit Payable Monthly. Predictability Variables are reasonably predictable. Healthcare Benefits Generally NOT funded. Generally uncapped and great variability. Retiree, spouse, and other dependents. As needed and used. Utilization difficult to predict. Level of cost varies geographically and fluctuates over time.
(b)
Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds under ERISA, the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits. The lack of required funding is particularly relevant for OPEB plans compared to pensions. Generally, this results in a much higher unfunded OPEB obligation reported in the balance sheet. In addition, with fewer assets in OPEB plan, there is a lower credit associated with the return-onasset component of OPEB expense.
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INTERNATIONAL REPORTING CASE
(a) The key differences arise from the use of shorter amortization periods for (1) unrecognized prior service costs, and (2) unrecognized actuarial differences. These latter items likely reflect unrecognized gains and losses, and would include asset gains and losses. Under U.S. GAAP, amortization periods are based on remaining service lives of employees, which is probably longer than five or ten years. One other difference that students might note are the relatively low discount rate and expected return assumptions used by this Japanese company. For example, Procter and Gamble (and many U.S. companies) use rates up to three times as high as the rates used by this Japanese company. It should be noted that there are several similarities. Under Japanese GAAP, the pension obligation is measured based on the projected benefit obligation and amount recognized is based on an amount net of the liability and plan assets. There is smoothing of gains and losses. Also, the components of pension expense are similar. (b) Shorter amortization periods will result in higher pension expense with respect to prior service costs. Depending on whether the company has unrealized gains or losses, the shorter amortization period for the actuarial differences may result in either higher or lower reported income. On the balance sheet, there will be less non-recognition of the prior service costs and gains and losses. So the net pension asset or liability will be measured closer to the net of the liability and fund assets. The reported amounts on Japanese balance sheets will be more volatile, since the smoothing period is shorter. (c) As indicated above, income and equity likely will be lower due to higher pension expense and lower net income. If there are significant asset gains (which is possible given the low expected return assumptions), then income could be higher as the gains are amortized into income more quickly. The lower discount rate used to measure the pension obligation will result in lower interest cost in income, but gives a higher measure of the projected benefit obligation.
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PROFESSIONAL RESEARCH: FASB CODIFICATION
(a) According to FASB ASC 715-30-35: 35-22 Asset gains and losses are differences between the actual return on plan assets during a period and the expected return on plan assets for that period. Asset gains and losses include both changes reflected in the market-related value of plan assets and changes not yet reflected in the market-related value (that is, the difference between the fair value of assets and the market-related value). Gains or losses on transferable securities issued by the employer and included in plan assets are also included in asset gains and losses. Asset gains and losses not yet reflected in market-related value are not required to be amortized under paragraphs 715-30-35-24 through 35-25. As a minimum, amortization of a net gain or loss included in accumulated other comprehensive income (excluding asset gains and losses not yet reflected in marketrelated value) shall be included as a component of net pension cost for a year if, as of the beginning of the year, that net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If amortization is required, the minimum amortization shall be that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. The amortization must always reduce the beginning-of-the-year balance. Amortization of a net gain results in a decrease in net periodic pension cost; amortization of a net loss results in an increase in net periodic pension cost. If all or almost all of a plans participants are inactive, the average remaining life expectancy of the inactive participants shall be used instead of the average remaining service period.
35-24
(b)
According to FASB ASC 715-30-35: Gains and Losses 35-18 As established in the definition of the term, a gain or loss results from a change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or from a change in an actuarial assumption. This Subtopic generally does not distinguish between gains and losses that result from experience different from that assumed or from changes in assumptions. Gains and losses include amounts that have been realized, for example by sale of a security, as well as amounts that are unrealized. Because gains and losses may reflect refinements in estimates as well as real changes in economic values and because some gains in one period may be offset by losses in another or vice versa, this Subtopic does not require recognition of gains and losses as components of net pension cost of the period in which they arise.
35-19
(c)
According to FASB ASC 715-30-25: 25-1 If the projected benefit obligation exceeds the fair value of plan assets, the employer shall recognize in its statement of financial position a liability that equals the unfunded projected benefit obligation. If the fair value of plan assets exceeds the projected benefit obligation, the employer shall recognize in its statement of financial position an asset that equals the overfunded projected benefit obligation.
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Measurement (a)
A 5 6 7 Items 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Balance, Jan. 1, 2010 Service cost Interest cost Actual /Expected return Amortization of PSC Contributions Benefits Liability increase Journal entry for 2010 Accumulated OCI, Dec. 31, 2009 Balance, Dec. 31, 2010 General Journal Entries Annual Pension Expense OCIPrior Service Cost OCI Gain/Loss Pension Asset/Liability (145,000) 90,000 56,250 (52,000) 19,000 (99,000) 76,000 71,000 0 71,000 85,000 (76,000) (66,250) Memo Record Projected Benefit Obligation Plan assets (625,000) (90,000) (56,250) 480,000 B C D E F G H I J K L M N
PROFESSIONAL SIMULATION
Cash
(5,000) (19,000)
57,000 99,000 (85,000)
113,250
(99,000)
(19,000) 100,000 81,000
(211,250)
(762,250)
551,000
Formula: (L9*.09)* 1
Formula: L9 + N9
Formula: B11* 1
20-2
PROFESSIONAL SIMULATION (Continued) (b) Simply change the formula in cell B11 to multiply by .07; change the formula in cell B12 to multiply .10 times (N9* 1). Journal Entry Other Comprehensive IncomeGain/Loss ................... Pension Expense ............................................................. Pension Asset /Liability ........................................... Cash .......................................................................... Other Comprehensive IncomePSC ..................... Disclosure Financial Statements Income Statement Pension expense..................................................... Balance Sheet Liabilities Pension liability ...................................................... Stockholders Equity Accumulated other comprehensive loss .............. *($81,000 + $71,000) $113,250 71,000 113,250 66,250 99,000 19,000
$211,250 $152,000*
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