Question

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1997. Prior to 2020, cumulative net pension expense recognized equaled cumulative contributions to the plan.Other relevant information about the pension plan on January 1, 2020, 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 $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, 2020, 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 2020 amounted to $200,000. The employer's contribution to the plan assets amounted to $775,000 in 2020. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

Compute the amount of the 2020 increase/decrease in net gains or losses and the amount to be amortized in 2020 and 2021.
Year	PBO	FV of Plan Assets	Corridor	Accumulate OCI	Amortization
2020
2021
d.
Prepare the journal entries required to report the accounting for the company's pension plan for 2020.
Account title and explanation	Debit	Credit
Pension expense
pension asset/liability
Other comprehensive income (G/L)
Other comprehensive income (PSC)
Cash

Answer 1

SOLUTION

WORKINGS:

(a)Prior Service Cost Amortization

(b)

Pension expense for 2020 comprised the following:
Service cost ........................................................................ $200,000
Interest on projected benefit obligation* .......................... 500,000
Actual return on plan assets** .......................................... (325,000)
Unexpected gain*** ............................................................ 25,000
Amortization of prior service cost .................................... 166,667
Pension expense ........................................................ $ 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)

REFER ABOVE WORKINGS a & b FOR BELOW SOLUTION c & d ;

(c)

Amortization in 2020: None because there was no beginning balance. Amortization in 2021 (corridor approach): $32,500, as shown below.

*$875,000 – $485,000 = $390,000; $390,000 ÷ 12 = $32,500

(d)