113 HW Solutions CH 17.docx - IMPORTANT ANNOUNCEMENT Your...

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IMPORTANT ANNOUNCEMENT: Your text and these solutions use PBO and Plan Assets as temporary accounts in the JEs. These accounts are then closed to Pension Liability. In each solution below presenting a JE, you can substitute Pension Liability for both PBO and Plan Assets. Either way results in the same financial reporting. I did the first one for you in E17-4, Requirement 1 Another difference is the recording of amortization of pension gain/loss-OCI and PSC-OCI. Your text and these solutions use the account “amortization of PSC-OCI” for example. My presentation simply debits or credits the PSC-OCI account when amortized. Again, either way is fine. The important point is that you know what you are doing in the JE. My way is illustrated as well in E17-4, Requirement 1. Exercise 17–1 Events I 1. Interest cost. N 2. Amortization of prior service cost. D 3. A decrease in the average life expectancy of employees. I 4. An increase in the average life expectancy of employees. I 5. A plan amendment that increases benefits is made retroactive to prior years. D 6. An increase in the actuary’s assumed discount rate. N 7. Cash contributions to the pension fund by the employer. D 8. Benefits are paid to retired employees. I 9. Service cost. N 10. Return on plan assets during the year lower than expected. N 11. Return on plan assets during the year higher than expected.
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Exercise 17–2 Basic JE item, 1st 3 components of pension  expense Data for exercise: 1/1/16 PBO, $30 mil 2016 benefits paid, $4 mil 2016 SC, $12 mil During 2016 plan assets increased $6 mil Discount rate, 10% Added information: plan assets 1/1/16, $50 mil at fair value, estimated long-term rate of return, 12% (this provides an example of pension asset rather than pension liability) Determine PBO at 12/31/16. (Note that pension asset at 1/1/16 is $20 mil = $50 assets - $30 PBO ($ in millions) Beginning of 2016 $30 Service cost 12 Interest cost 3 (10% x $30) Loss (gain) on PBO 0 Less: Retiree benefits (4 ) End of 2016 $41 Let’s compute and record pension expense too. Pension expense and components: 1. SC 12 2. int cost 3 3. e return (6) 50(.12) Pension exp 9 Pension expense 9 Pension asset 9 There is no JE for benefits paid. There is no information on the funding contribution is provided so we cannot record that JE. But let’s assume it was $14 mil.
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Pension asset 14 Cash 14 Now we can determine ending pension asset two ways. 1. Component approach: Assets 50 bb + 14 fund – 4 bens + 6 act ret 66 PBO (from above) -41 Pension asset ending 25 2. JE approach: 20 bb – 9 (JE 1) + 14 (JE 2) = 25
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Exercise 17–4 Pension expense includes a service cost of $10 million. The firm began the year with a pension liability of $28 million (underfunded pension plan). Required: Prepare the appropriate general journal entries to record Harrison’s pension expense in each of the following independent situations regarding the other components of pension expense ($ in millions): 1. Interest cost, $6; expected return on assets, $4; amortization of net loss, $2.
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