Question

Defined Benefit Plan Assignment

The following information pertains to Company A's Year 5 defined benefit pension plan:

January 1, Year 5, fair value of plan assets $100,000    January 1, Year 5, projected benefit obligation (PBO) 200,000    Contribution to the plan (made on December 31, Year 5)    10,000 Benefits paid to employees (made on December 31, Year 5)    15,000 December 31, Year 5, fair value of plan assets    106,000    Discount Rate    5%    Expected ling-term rate of return on plan assets 8%    Service cost recognized in Year 5 40,000 Prior service cost recoginized in Year 5    70,000

Additional Information    - On December 31, Year 5, company amended its defined benefits plan, resulting in an increase of $70,000 in the PBO.    - Neither net gain, or loss, in relation to the company's defined benefit plan nor prior service cost were recognized in prior years.    - The company applies the corridor approach to account for its net gains or losses in relation to the defined benefit plan.    - Assume that the market-related value of thr plan assets is equal to the fair value of plan assets.    - Average remaining service period of active employees is 10 years.

Required: Compute pension expense, plan assets at the end of Year5, PBO at the end of Year 5 and prepare all journal entries. Show computations.

Answer 1

Amortization of Prior service cost (Prior service cost / Average remaining service life in years)	7000
Amortization of net loss – AOCI
Pension benefits obligation	200000
Plan assets at fair value	100000
Whichever is higher from above	200000
Net Loss – AOCI	70000
Less: 10% of higher amount as per Corridor rule (200000*10%)	-20000
Excess at beginning	50000
Average remaining service life in years	10
Amortization of net loss - AOCI (Excess at beginning / Average remaining service life in years)	5000
Corridor rule for Amortization of net loss – AOCI
If the gain or loss exceed 10% of (Pension benefits obligation or Plan assets at fair value, whichever is higher). In this case, corridor rule allows actuarial gain or loss to be amortized over service life period into income statement.
If the gain or loss less than 10% of (Pension benefits obligation or Plan assets at fair value, whichever is higher). In this case, corridor rule does not allow reporting of amortization of net gain or loss.

Company name
Pension Worksheet
Minus sign indicate credit and positive indicate debit.
	Memo fields		AOCI		Pension Expense	Cash	Net pension Liability/Assets
	Pension benefits obligation	Plan assets	Prior service cost	Net Loss
Beginning Balance	-200000	100000	70000	70000			-100000
Service cost	-40000				40000
Interest cost	-10000				10000
Return on plan Assets		8000			-8000
Amortization of Prior service cost			-7000		7000
Amortization of net loss				-5000	5000
Gain on Pension benefits obligation due to change in actuarial assumptions	0			0
Contribution to pension fund		10000				-10000
Pension benefits paid	15000	-15000
Journal Entries			-7000	-5000	54000	-10000	-32000
Ending Balance	-235000	103000	63000	65000			-132000

Pension expense	54000
Plan assets at the end of Year5	103000
PBO at the end of Year 5	235000
Net pension assets (-235000+103000) minus means net assets liabilities	-132000

Company name
Journal entries
Date	Account title & explanation	Debit	Credit
	Pension Expense	54000
	Net pension Liability/Assets		32000
	Prior service cost - AOCI		7000
	Net Loss - AOCI		5000
	Cash		10000
	(To record Pension Expense.)