Question

Problem 20-6

Indigo Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows.

1. 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.

2. The projected benefit obligation amounted to $4,952,000 and the fair value of pension plan assets was $3,032,000. The market-related asset value was also $3,032,000. Unrecognized prior service cost was $1,920,000.

On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were $4,907,000 and $4,064,000, respectively. The fair value of the pension plan assets amounted to $4,133,000 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 2017 amounted to $201,000. The employer’s contribution to the plan assets amounted to $762,000 in 2017. This problem assumes no payment of pension benefits.

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 2017, 2018, and 2019. Compute pension expense for the year 2017. Compute pension expense for the year 2017.

Prepare the journal entries required to report the accounting for the company’s pension plan for 2017.

Answer 1

a)Prior service cost amortization
2017	$            160,000	1920000/12
2018	$            160,000	1920000/12
2019	$            160,000	1920000/12
b)
Service cost	$            201,000
Interest on PBO	$            495,200
4952000*0.1
Actual return on plant assets	$         (339,000)
4133000-3032000-762000
Unexpected gain	$              35,800
3032000*0.1-339000
Amortization of PSC	$            160,000
Pension expense	$            553,000
c)
Pension liability at the beginning	1920000
Pension liability at the end	774000
4907000-4133000
Decrease in liability	1146000
Journal entry
Pension expense	$            553,000
Pension asset/liability	$        1,146,000
OCI-G/L		$        777,000
OCI-PSC		$        160,000
Cash		$        762,000