Question
In: Accounting
Turner Inc. provides a defined benefit pension plan to its employees. The company has 150 employees....
Turner Inc. provides a defined benefit pension plan to its employees. The company has 150 employees. The remaining amortization period at December 31, 2016, for prior service cost is 5 years. The average remaining service life of employees is 11 years at January 1, 2017, and 10 years at December 31, 2017. The AOCI—net actuarial (gain) loss was zero at December 31, 2016. Turner smooths recognition of its gains and losses when computing its market-related value to compute expected return.
Additional Information:
| December 31, | ||||||||||||
| Description | 2017 | 2016 | ||||||||||
| PBO | $ | 1,450,000 | $ | 1,377,000 | ||||||||
| ABO | 1,425,000 | 1,350,000 | ||||||||||
| Fair value of plan assets | 1,395,000 | 1,085,000 | ||||||||||
| Market-related value of plan assets (smoothed recognition) | 1,369,000 | 1,085,000 | ||||||||||
| AOCI—prior service cost | ? | 292,000 | ||||||||||
| Balance sheet pension asset (liability) | ? | (292,000 | ) | |||||||||
| Service cost | 117,400 | |||||||||||
| Contribution | 169,000 | |||||||||||
| PBO actuarial gain | 113,250 | |||||||||||
| Benefit payments made | None | None | ||||||||||
| Discount rate | 5 | % | 5 | % | ||||||||
| Expected rate of return | 7 | % | 7 | % | ||||||||
Required:
Compute the amount of prior service cost that would be amortized as a component of pension expense for 2017 and 2018.
Compute the actual return on plan assets for 2017.
Compute the unexpected net gain or loss on plan assets for 2017.
Compute pension expense for 2017.
Prepare the company’s required pension journal entries for 2017.
Compute the 2017 increase/decrease in AOCI—net actuarial (gain) loss and the amount to be amortized in 2017 and 2018.
Confirm that the pension asset (liability) on the balance sheet equals the funded status as of December 31, 2017.
Solutions
Expert Solution
Ans-1 Computation of Prior service cost for 2017 and 2018:
Prior service cost amortization =AOCI-Prior service cost
Average remaining service life
| Year ended 2017 (292,000/5) | $58,400 |
| Year ended 2018 (292,000/5) | $58,400 |
Ans- 2 Computation of Actual Return on Plan Assets:
Actual return =Ending balance of plan assets-Beginning balance-Contribution
=$1,395,000-$1,085,000-$169,000
=$141,000
Ans-3 Computaion of unexpected gain or loss on plan assets for 2017
| Actual return on plan assets | $141,000 |
| Less: Expected return ($1,085,000*7%) | (75,950) |
| Unexpected gain | $65,050 |
Ans-Computaion of pension expenses for 2017:
| Service cost | $117,400 |
| Add:Interest cost ($1,377,000*5%) | 68,850 |
| Less:Expected return | (75,950) |
| Add:Amortization of prior service costs | 58,400 |
| Total Pension Expenses | $168,700 |
Ans- Journal Entries for 2017:
| Pension Expenes A/c Dr. | $168,700 | |
| AOCI-Prior service cost A/c | $58,400 | |
| Pension asset (liability) A/c | $110,300 | |
| (To record pension expenses for 2017) | ||
| Pension asset (liability) A/c Dr. | $169,000 | |
| Cash A/c | $169,000 | |
| (To record contribution for 2017 | ||
| Pension asset (liability) A/c Dr. | $65,050 | |
| AOCI-net actuarial gain (loss) A/c | $65,050 | |
| (To record the unexpected gain on plan assets) | ||
| Pension asset (liability) A/c Dr. | $113,250 | |
| AOCI-net actuarial gain A/c | $113,350 | |
| (To record the PBO actuarial gain) |
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