Question

A partially completed pension spreadsheet showing the relationships among the elements that constitute Carney, Inc.’s defined benefit pension plan follows. Six years earlier, Carney revised its pension formula and recalculated benefits earned by employees in prior years using the more generous formula. The prior service cost created by the recalculation is being amortized at the rate of $5 million per year. At the end of 2021, the pension formula was amended again, creating an additional prior service cost of $40 million. The expected rate of return on assets and the actuary’s discount rate were 10%, and the average remaining service life of the active employee group is 10 years. 

 

Required: 

1. Fill in the missing amounts. 

2. Prepare the 2021 journal entry to record pension expense. 

3. Prepare the journal entry(s) to record any 2021 gains and losses and new prior service cost in 2021. 

4. Prepare the 2021 journal entries to record (a) the cash contribution to plan assets and (b) the payment of retiree benefits.

Answer 1

(1)

Prepare 2021 journal entry to record pension expense.

Date	Amount Title and explanation	Debit ($)	Credit ($)
2021
	Pension Expense	95,000,000
	Plan Assets	68,000,000
	Projected Benefit Obligation		157,000,000
	Amortization of Prior Service Cost		5,000,000
	Amortization of Net Loss-OCI		1,000,000
	(To record the pension expense)

 

Explanation:

• Pension Expense is an expense account. Expenses decrease Equity value. Therefore, debit Pension Expense account with $95,000,000.

• Plan Assets are asset account. Since the assets are invested in companies to pay pension expense, the asset value increased. Therefore, debit Plan Assets account with $68,000,000.

•

Projected Benefit Obligation is a liability account. Since the amount owed has increased, the liability has increased. Therefore, credit Projected Benefit Obligation account with $157,000,000.

• Amortization of Prior Service Cost is an unrecognized expense account. Since prior service cost is amortized, this account is credited to reduce the accumulated other comprehensive income. Therefore, credit Amortization of Prior Service Cost account with $5,000,000.

• Amortization of Net Loss is an income account. Loss is recorded as a gain to recognize the excess of actual return over expected return. Therefore, credit Amortization of Net Loss account with $1,000,000.

 

Working note:

Compute the PBO.

Projected benefit obligation = Service cost + Interest cost

                                             = $74,000,000 + $83,000,000

                                             = $157,000,000

(2)

Prepare journal entry to record 2018 gains and losses.

Date	Account Title and Explanation	Debit ($)	Credit ($)
2021
	Loss – OCI	7,000,000
	Plan Assets		7,000,000
	(To record the losses.)

 

Explanation:

• Other Comprehensive Income: Net Loss is an expense account. Gain is recorded as a loss to recognize the excess of expected return over actual return. Therefore, debit Other Comprehensive Income: Net Loss account with $7,000,000.

• Plan Assets are asset account. Since the assets invested in companies to pay pension expense recognize loss, the asset value decreased. Therefore, credit Plan Assets account with $7,000,000.

 

Working note:

Compute the gain or loss on plan assets:

Loss on Plan Assets = Actual Return – Expected Return

                                    = $61,000,000 - $68,000,000

                                    = $(7,000,000)

 

Prepare journal entry to record new prior service cost. 

Date	Account title and Explanation	Debit ($)	Credit ($)
2021
	Loss – OCI	13,000,000
	Prior Service Cost – OCI	40,000,000
	PBO		57,000,000
	(To record the prior service cost.)

 

Explanation:

• Other Comprehensive Income: Net Loss is an expense account. Gain is recorded as a loss to recognize the excess of expected return over actual return. Therefore, debit Other Comprehensive Income: Net Loss account with $13,000,000.

• Other Comprehensive Income: Prior Service Cost is an unrecognized expense account. Expenses decrease Equity value. Therefore, debit Other Comprehensive Income: Prior Service Cost account with $40,000,000.

• Projected Benefit Obligation is a liability account. Since the amount owed has increased, the liability has increased. Therefore, debit Projected Benefit Obligation account with $53,000,000.

 

(3)

Prepare 2018 journal entries to record the cash contribution to plan assets.

Date	Account title and Explanation	Debit ($)	Credit ($)
2021
	Plan Assets	84,000,000
	Cash		84,000,000
	(To record cash contribution to plan assets)

 

Explanation:

• Plan Assets are asset account. Since the assets are invested in companies to pay pension expense, the asset value increased. Therefore, debit Plan Assets account with $84,000,000.

• Cash is an asset account. Since cash is paid, asset value decreased. Therefore, credit Cash account with $84,000,000.

 

Prepare 2018 journal entries to record the payment of retiree benefits. 

Date	Account title and Explanation	Debit ($)	Credit ($)
2021
	PBO	50,000,000
	Plan Assets		50,000,000
	(To record payments to retiree benefits.)

 

Explanation:

• Projected Benefit Obligation is a liability account. Since the amount owed is paid, the liability has decreased. Therefore, debit Projected Benefit Obligation account with $50,000,000.

• Plan Assets are asset account. Since the assets invested in companies to pay pension expense recognize loss, the asset value decreased. Therefore, credit Plan Assets account with $50,000,000.

(1)

Prepare 2021 journal entry to record pension expense.

Date	Amount Title and explanation	Debit ($)	Credit ($)
2021
	Pension Expense	95,000,000
	Plan Assets	68,000,000
	Projected Benefit Obligation		157,000,000
	Amortization of Prior Service Cost		5,000,000
	Amortization of Net Loss-OCI		1,000,000
	(To record the pension expense)