Question

Mayer Corporation has a defined benefit pension plan. Mayer’s policy is to fund the plan annually, cash payments being made at the end of each year. Data relating to the pension plan for 2021 are as follows: 

 

Required: 

Recreate the journal entries used to record Mayer’s 2021 pension expense, gain on plan assets, and funding of plan assets in order to determine the cash paid to the pension trustee as reported in the statement of cash flows.

Answer 1

 

Pension Plan

 

Pension plan is a fixed retirement benefits that are determined by a specific designated formula.

Pension Expense

Pension is a payment provided to the employees at the time of their retirement. It is based on years of service, annual compensation and age.

 

Prepare journal entries for pension expenses of M at the year of 2021:

 

Date	Account Title and Explanation	Post Ref.	Debit ($ in millions)	Credit ($ in millions)
December 31, 2021	Pension expense (E–)		82
	Plan assets (A+)		90
	PBO (L+)			163
	Amortization of net loss – OCI (E+)			1
	Amortization of prior service cost – OCI (E+)			8
	(To record the pension expense, prior service cost and the loss.)

 

Explanation:

• Pension expense is reduces the stockholder’s equity. Therefore debit Pension expense account with $82.

• Plan assets increase the value of asset. Therefore debit Plan assets account with $90.

• Projected benefit obligation is a liability and is increased. Therefore, credit Projected benefits obligation account with $163.

• Loss – other comprehensive income increase the stockholders’ equity. Therefore, credit Loss – Other comprehensive income account with $1.

• Prior service cost – Other Comprehensive Income increase the stockholders’ equity. Therefore, credit Prior service cost – Other Comprehensive Income with $8.

 

Date	Account Title and Explanation	Post Ref.	Debit ($ in millions)	Credit ($ in millions)
December 31, 2021	Plan assets (A+)		9
	Gain –OCI (E+)			9
	(To record the gain)

 

Explanation:

• Gain – other comprehensive income increases the stockholders’ equity. Therefore, credit Gain – Other comprehensive income account with $22.

• Plan assets increase the value of asset. Therefore, debit Plan assets account with $9.

 

Date	Account Title and Explanation	Post Ref.	Debit ($ in millions)	Credit ($ in millions)
December 31, 2021	Plan assets (A+)		81
	Cash (A–)			81
	(To record the contributions made.)

 

Explanation:

• Plan assets increase the value of asset. Therefore, debit Plan assets account with $81.

• Cash decrease the value of asset. Therefore credit Cash account with $81.

 

Working notes:

Calculate the amount of projected benefit obligation – PBO:

PBO = Service cost + Interest cost

         = $112 + 51

         = $163

 

Calculate the amount of plan assets:

Plan assets = [Plan assets in 2021-Plan assets in 2020 – 

                        Expected return on plan assets – Gain on the plan assets]

                    = ($1,080 - $900 - $90 - $9)

                    = $81

 

PBO = $163

Plan assets = $81