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Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year’s financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows.
\r\nNote J. The company has a defined benefit pension plan covering substantially all of its employees.
\r\nThe benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation’s comparative income statement was $72,000 in 2014 and $57,680 in 2013.
\r\nThe following are selected figures from the plan’s funded status and amounts recognized in the Davis
\r\nCorporation’s Statement of Financial Position at December 31, 2014 ($000 omitted).
\r\nActuarial present value of benefi t obligations:
\r\nAccumulated benefi t obligation
\r\n(including vested benefi ts of $636) $ (870)
\r\nProjected benefi t obligation $(1,200)
\r\nPlan assets at fair value 1,050
\r\nProjected benefi t obligation in excess of plan assets $ (150)
\r\nGiven that Davis Corporation’s work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense.
\r\nInstructions
\r\n(a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements.
\r\n(b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation.
\r\n(c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise.
\r\n(2) Briefly describe how pension gains and losses are recognized.
In examining the costs of pension plans, Helen Kaufman, CPA, encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.
\r\nInstructions
\r\n(a) (1) Discuss the theoretical justification for accrual recognition of pension costs.
\r\n(2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-yougo) accounting for annual pension costs.
\r\n(b) Explain the following terms as they apply to accounting for pension plans.
\r\n(1) Market-related asset value.
\r\n(2) Projected benefit obligation.
\r\n(3) Corridor approach.
\r\n(c) What information should be disclosed about a company’s pension plans in its financial statements and its notes?
The following items appear on Brueggen Company’s financial statements.
\r\n1. Under the caption Assets: Pension asset/liability.
\r\n2. Under the caption Liabilities: Pension asset/liability.
\r\n3. Under the caption Stockholders’ Equity:
\r\nPrior service cost as a component of Accumulated Other Comprehensive Income.
\r\n4. On the income statement: Pension expense.
\r\nInstructions
\r\nExplain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)
Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. During recent decades, a marked increase in this concern has resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones.
\r\nThe substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.
\r\nInstructions
\r\n(a) Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?
\r\n(b) Differentiate between “accounting for the employer” and “accounting for the pension fund.”
\r\n(c) Explain the terms “funded” and “pension liability” as they relate to:
\r\n(1) The pension fund.
\r\n(2) The employer.
\r\n(d) (1) Discuss the theoretical justification for accrual recognition of pension costs.
\r\n(2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.
\r\n(e) Distinguish among the following as they relate to pension plans.
\r\n(1) Service cost.
\r\n(2) Prior service costs.
\r\n(3) Vested benefits.
Elton Co. has the following postretirement benefit plan balances on January 1, 2014.
\r\nAccumulated postretirement benefi t obligation $2,250,000 Fair value of plan assets 2,250,000
\r\nThe interest (settlement) rate applicable to the plan is 10%. On January 1, 2015, the company amends the plan so that prior service costs of $175,000 are created. Other data related to the plan are: 2014 2015
\r\nService costs $ 75,000 $ 85,000
\r\nPrior service costs amortization –0– 12,000
\r\nContributions (funding) to the plan 45,000 35,000
\r\nBenefi ts paid 40,000 45,000
\r\nActual return on plan assets 140,000 120,000
\r\nExpected rate of return on assets 8% 6%
\r\nInstructions
\r\n(a) Prepare a worksheet for the postretirement plan in 2014.
\r\n(b) Prepare any journal entries related to the postretirement plan that would be needed at December 31, 2014.
\r\n(c) Prepare a worksheet for 2015 and any journal entries related to the postretirement plan as of December 31, 2015.
\r\n(d) Indicate the postretirement-benefit–related amounts reported in the 2015 financial statements.
Hollenbeck Foods Inc. sponsors a postretirement medical and dental benefit plan for its employees. The following balances relate to this plan on January 1, 2014.
\r\nPlan assets $200,000
\r\nExpected postretirement benefi t obligation 820,000
\r\nAccumulated postretirement benefi t obligation 200,000
\r\nNo prior service costs exist.
\r\nAs a result of the plan’s operation during 2014, the following additional data are provided by the actuary.
\r\nService cost is $70,000
\r\nDiscount rate is 10%
\r\nContributions to plan are $65,000
\r\nExpected return on plan assets is $10,000
\r\nActual return on plan assets is $15,000
\r\nBenefi ts paid to employees are $44,000
\r\nAverage remaining service to full eligibility: 20 years
\r\nInstructions
\r\n(a) Using the preceding data, compute the net periodic postretirement benefit cost for 2014 by preparing a worksheet that shows the journal entry for postretirement expense and the year-end balances in the related postretirement benefit memo accounts. (Assume that contributions and benefits are paid at the end of the year.)
\r\n(b) Prepare any journal entries related to the postretirement plan for 2014 and indicate the postretirement amounts reported in the financial statements for 2014.
Larson Corp. sponsors a defined benefit pension plan for its employees. On January 1, 2015, the following balances related to this plan. Plan assets (market-related value) $270,000 Projected benefi t obligation 340,000 Pension asset/liability 70,000 Cr.
\r\nPrior service cost 90,000
\r\nOCI—Loss 39,000
\r\nAs a result of the operation of the plan during 2015, the actuary provided the following additional data for
\r\n2015. Service cost $45,000
\r\nActual return on plan assets 27,000
\r\nAmortization of prior service cost 12,000
\r\nContributions 65,000
\r\nBenefi ts paid retirees 41,000
\r\nSettlement rate 7%
\r\nExpected return on plan assets 8%
\r\nAverage remaining service life of active employees 10 years
\r\nInstructions
\r\n(a) Compute pension expense for Larson Corp. for the year 2015 by preparing a pension worksheet that shows the journal entry for pension expense.
\r\n(b) Indicate the pension amounts reported in the financial statements.
The following data relate to the operation of Kramer Co.’s pension plan in
\r\n2015. The pension worksheet for 2014 is provided in P20-10.
\r\nService cost $59,000
\r\nActual return on plan assets 32,000
\r\nAmortization of prior service cost 28,000
\r\nAnnual contributions 51,000
\r\nBenefi ts paid retirees 27,000
\r\nAverage service life of all employees 25 years
\r\nFor 2015, Kramer will use the same assumptions as 2014 for the expected rate of returns on plan assets. The settlement rate for 2015 is 10%.
\r\nInstructions
\r\n(a) Prepare a pension worksheet for 2015 and accompanying computations and amortization of the loss, if any, in 2015 using the corridor approach.
\r\n(b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31.
\r\n(c) Indicate the pension amounts reported in the financial statements.
Kramer Co. has prepared the following pension worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2014.
\r\n\r\n
Instructions
\r\n(a) Determine the missing amounts in the 2014 pension worksheet, indicating whether the amounts are debits or credits.
\r\n(b) Prepare the journal entry to record 2014 pension expense for Kramer Co.
\r\n(c) Determine the following for Kramer for 2014: (1) settlement rate used to measure the interest on the liability and (2) expected return on plan assets.
Hobbs Co. has the following defined benefit pension plan balances on January 1, 2014. Projected benefi t obligation $4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2015, the company amends its agreement so that prior service costs of $600,000 are created. Other data related to the pension plan are:
\r\n2014 2015 Service cost $150,000 $170,000
\r\nPrior service cost amortization –0– 90,000
\r\nContributions (funding) to the plan 200,000 184,658
\r\nBenefi ts paid 220,000 280,000
\r\nActual return on plan assets 252,000 350,000
\r\nExpected rate of return on assets 6% 8%
\r\nInstructions
\r\n(a) Prepare a pension worksheet for the pension plan in 2014.
\r\n(b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2014.
\r\n(c) Prepare a pension worksheet for 2015 and any journal entries related to the pension plan as of
\r\nDecember 31, 2015.
\r\n(d) Indicate the pension-related amounts reported in the 2015 financial statements.
Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2014 and 2015.
\r\n2014 2015 Projected benefi t obligation, January 1 $600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 $ 59,000
\r\nSettlement rate 10% 10%
\r\nExpected rate of return 10% 10%
\r\nActual return on plan assets 36,000 61,000
\r\nAmortization of prior service cost 70,000 50,000
\r\nAnnual contributions 97,000 81,000
\r\nBenefi ts paid retirees 31,500 54,000
\r\nIncrease in projected benefi t obligation due to changes in actuarial assumptions 87,000 –0–
\r\nAccumulated benefi t obligation at December 31 721,800 789,000
\r\nAverage service life of all employees 20 years
\r\nVested benefi t obligation at December 31 464,000
\r\nInstructions
\r\n(a) Prepare a pension worksheet presenting both years 2014 and 2015 and accompanying computations and amortization of the loss (2015) using the corridor approach.
\r\n(b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year.
\r\n(c) For 2015, indicate the pension amounts reported in the financial statements.
Hanson Corp. sponsors a defined benefit pension plan for its employees. On
\r\nJanuary 1, 2014, the following balances related to this plan.
\r\nPlan assets (market-related value) $520,000
\r\nProjected benefi t obligation 700,000 Pension asset/liability 180,000 Cr.
\r\nPrior service cost 81,000
\r\nNet gain or loss (debit) 91,000
\r\nAs a result of the operation of the plan during 2014, the actuary provided the following additional data for
\r\n2014.
\r\nService cost $108,000
\r\nSettlement rate, 9%; expected return rate, 10%
\r\nActual return on plan assets 48,000
\r\nAmortization of prior service cost 25,000
\r\nContributions 133,000
\r\nBenefi ts paid retirees 85,000
\r\nAverage remaining service life of active employees 10 years
\r\nInstructions
\r\nUsing the preceding data, compute pension expense for Hanson Corp. for the year 2014 by preparing a pension worksheet that shows the journal entry for pension expense. Use the market-related asset value to compute the expected return and for corridor amortization.
Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1991. Prior to 2014, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2014, is as follows.
\r\n1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years.
\r\n2. The projected benefit obligation amounted to $5,000,000 and the fair value of pension plan assets was $3,000,000. The market-related asset value was also $3,000,000. Unrecognized prior service cost was $2,000,000. On December 31, 2014, the projected benefit obligation and the accumulated benefit obligation were $4,850,000 and $4,025,000, respectively. The fair value of the pension plan assets amounted to $4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2014 amounted to $200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2014. This problem assumes no payment of pension benefits.
\r\nInstructions
\r\n(Round all amounts to the nearest dollar.)
\r\n(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2014, 2015, and 2016.
\r\n(b) Compute pension expense for the year 2014.
\r\n(c) Prepare the journal entries required to report the accounting for the company’s pension plan for 2014.
\r\n(d) Compute the amount of the 2014 increase/decrease in net gains or losses and the amount to be amortized in 2014 and 2015.
Hiatt Toothpaste Company initiates a defined benefit pension plan for its 50 employees on January 1, 2014. The insurance company which administers the pension plan provided the following selected information for the years 2014, 2015, and 2016. For Year Ended December 31,
\r\n2014 2015 2016
\r\nPlan assets (fair value) $50,000 $ 85,000 $180,000
\r\nAccumulated benefi t obligation 45,000 165,000 292,000
\r\nProjected benefi t obligation 60,000 200,000 324,000
\r\nNet (gain) loss (for purposes of corridor calculation) –0– 78,400 86,121
\r\nEmployer’s funding contribution (made at end of year) 50,000 60,000 105,000
\r\nThere were no balances as of January 1, 2014, when the plan was initiated. The actual and expected return on plan assets was 10% over the 3-year period, but the settlement rate used to discount the company’s pension obligation was 13% in 2014, 11% in 2015, and 8% in 2016. The service cost component of net periodic pension expense amounted to the following: 2014, $60,000; 2015, $85,000; and 2016, $119,000. The average remaining service life per employee is 12 years. No benefits were paid in 2014, $30,000 of benefits were paid in 2015, and $18,500 of benefits were paid in 2016 (all benefits paid at end of year).
\r\nInstructions
\r\n(Round to the nearest dollar.)
\r\n(a) Calculate the amount of net periodic pension expense that the company would recognize in 2014, 2015, and 2016.
\r\n(b) Prepare the journal entries to record net periodic pension expense, employer’s funding contribution, and related pension amounts for the years 2014, 2015, and 2016.
Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2014 and 2015. 2014 2015
\r\nPlan assets (fair value), December 31 $699,000 $849,000
\r\nProjected benefi t obligation, January 1 700,000 800,000
\r\nPension asset/liability, January 1 140,000 Cr. ?
\r\nPrior service cost, January 1 250,000 240,000
\r\nService cost 60,000 90,000
\r\nActual and expected return on plan assets 24,000 30,000
\r\nAmortization of prior service cost 10,000 12,000
\r\nContributions (funding) 115,000 120,000
\r\nAccumulated benefi t obligation, December 31 500,000 550,000
\r\nInterest/settlement rate 9% 9%
\r\nInstructions
\r\n(a) Compute pension expense for 2014 and 2015.
\r\n(b) Prepare the journal entries to record the pension expense and the company’s funding of the pension plan for both years.
Gottschalk Company sponsors a defined benefit plan for its 100 employees. On January 1, 2014, the company’s actuary provided the following information.
\r\nAccumulated other comprehensive loss (PSC) $150,000
\r\nPension plan assets (fair value and market-related asset value) 200,000
\r\nAccumulated benefi t obligation 260,000
\r\nProjected benefi t obligation 380,000
\r\nThe average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2014, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to
\r\n$52,000; the projected benefit obligation was $490,000; fair value of pension assets was $276,000; the accumulated benefit obligation amounted to $365,000. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is $11,000. The company’s current year’s contribution to the pension plan amounted to $65,000. No benefits were paid during the year.
\r\nInstructions
\r\n(a) Determine the components of pension expense that the company would recognize in 2014. (With only one year involved, you need not prepare a worksheet.)
\r\n(b) Prepare the journal entry to record the pension expense and the company’s funding of the pension plan in 2014.
\r\n(c) Compute the amount of the 2014 increase/decrease in gains or losses and the amount to be amortized in 2014 and 2015.
\r\n(d) Indicate the pension amounts reported in the financial statement as of December 31, 2014.
Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2013, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data relating to 3 years’ operation of the plan are as follows.
\r\n2013 2014 2015 Annual service cost $16,000 $ 19,000 $ 26,000
\r\nSettlement rate and expected rate of return 10% 10% 10%
\r\nActual return on plan assets 18,000 22,000 24,000
\r\nAnnual funding (contributions) 16,000 40,000 48,000
\r\nBenefi ts paid 14,000 16,400 21,000
\r\nPrior service cost (plan amended, 1/1/14) 160,000
\r\nAmortization of prior service cost 54,400 41,600
\r\nChange in actuarial assumptions establishes
\r\na December 31, 2015, projected benefi t obligation of: 520,000
\r\nInstructions
\r\n(a) Prepare a pension worksheet presenting all 3 years’ pension balances and activities.
\r\n(b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year.
\r\n(c) Indicate the pension-related amounts reported in the financial statements for 2015.
On January 1, 2014, Harrington Company has the following defined benefit pension plan balances.
\r\nProjected benefi t obligation $4,500,000
\r\nFair value of plan assets 4,200,000
\r\nThe interest (settlement) rate applicable to the plan is 10%. On January 1, 2015, the company amends its pension agreement so that prior service costs of $500,000 are created. Other data related to the pension plan are as follows.
\r\n2014 2015
\r\nService cost $150,000 $180,000
\r\nPrior service cost amortization –0– 90,000
\r\nContributions (funding) to the plan 240,000 285,000
\r\nBenefi ts paid 200,000 280,000
\r\nActual return on plan assets 252,000 260,000
\r\nExpected rate of return on assets 6% 8%
\r\nInstructions
\r\n(a) Prepare a pension worksheet for the pension plan for 2014 and 2015.
\r\n(b) For 2015, prepare the journal entry to record pension-related amounts.
The accounting staff of Holder Inc. has prepared the following postretirement benefit worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2014.
\r\n\r\n
Instructions
\r\n(a) Determine the missing amounts in the 2014 postretirement worksheet, indicating whether the amounts are debits or credits.
\r\n(b) Prepare the journal entry to record 2014 postretirement expense for Holder Inc.
\r\n(c) What discount rate is Holder using in accounting for the interest on its other postretirement benefit plan? Explain.
Using the information in E20-22, prepare a worksheet inserting January 1, 2014, balances, showing December 31, 2014, balances, and the journal entry recording postretirement benefit expense.
Englehart Co. provides the following information about its postretirement benefit plan for the year 2014.
\r\nService cost $ 90,000
\r\nPrior service cost amortization 3,000
\r\nContribution to the plan 56,000
\r\nActual and expected return on plan assets 62,000
\r\nBenefi ts paid 40,000
\r\nPlan assets at January 1, 2014 710,000
\r\nAccumulated postretirement benefi t obligation at January 1, 2014 760,000 Accumulated OCI (PSC) at January 1, 2014 100,000 Dr.
\r\nDiscount rate 9%
\r\nInstructions
\r\nCompute the postretirement benefit expense for 2014.
Garner Inc. provides the following information related to its postretirement benefits for the year 2014.
\r\nAccumulated postretirement benefi t obligation at January 1, 2014 $710,000
\r\nActual and expected return on plan assets 34,000
\r\nPrior service cost amortization 21,000
\r\nDiscount rate 10%
\r\nService cost 83,000
\r\nInstructions
\r\nCompute postretirement benefit expense for 2014.
Using the information in E20-19, prepare a worksheet inserting January 1, 2014, balances, and showing December 31, 2014, balances. Prepare the journal entry recording postretirement benefit expense.
Kreter Co. provides the following information about its postretirement benefit plan for the year 2014.
\r\nService cost $ 45,000
\r\nContribution to the plan 10,000
\r\nActual and expected return on plan assets 11,000
\r\nBenefi ts paid 20,000
\r\nPlan assets at January 1, 2014 110,000
\r\nAccumulated postretirement benefi t obligation at January 1, 2014 330,000
\r\nDiscount rate 8%
\r\nInstructions
\r\nCompute the postretirement benefit expense for 2014.
The accounting staff of Usher Inc. has prepared the following pension worksheet. Unfortunately, several entries in the worksheet are not decipherable. The company has asked your assistance in completing the worksheet and completing the accounting tasks related to the pension plan for 2014.
\r\n\r\n
Instructions
\r\n(a) Determine the missing amounts in the 2014 pension worksheet, indicating whether the amounts are debits or credits.
\r\n(b) Prepare the journal entry to record 2014 pension expense for Usher Inc.
\r\n(c) The accounting staff has heard of a pension accounting procedure called “corridor amortization.”
\r\nIs Usher required to record any amounts for corridor amortization in (1) 2014? In (2) 2015?
\r\nExplain.
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