Question

The funded status of Hilton Paneling Inc.’s defined benefit pension plan and the balances in prior service cost and the net gain—pensions, are given below ($ in thousands): 

Retirees were paid $270,000, and the employer contribution to the pension fund was $245,000 at the end of 2021. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 7%. There were no changes in actuarial estimates and assumptions regarding the PBO. 

 

Required:

Determine the following amounts for 2021: 

1. Actual return on plan assets. 

2. Loss or gain on plan assets. 

3. Service cost. 

4. Pension expense. 

5. Average remaining service life of active employees (used to determine amortization of the net gain).

Answer 1

(1) Determine the actual return on plan assets:

The plan assets provide return on the assets invested. This return may be in form of dividends, interest, and capital gains generated by these assets invested in company’s pension fund.

 

The actual return on plan assets is calculated by deducting the sum of cash contributions received and beginning balance of plan assets from the sum of ending balance of plan assets and the retiree benefits paid. 

 

Use the following table to calculate the actual return on plan assets:

Particulars	Amount ($)
Plan assets
Ending balance of 2021	2,591
Add: Retiree benefits paid	270
	2,861
Less: Cash contributions received	(245)
Beginning balance of 2021	(2,400)
Actual return	216

 

Hence, the actual return on plan assets is $216.

 

(2) Determine the loss or gain on plan assets:

As per US GAAP, companies are required to differentiate the expected and actual return on plan assets and should recognize the loss or gain on plan assets. Therefore, the loss or gain on plan assets is calculated as the difference between the expected and actual return. Use the following table to calculate the loss or gain on plan assets:

Particulars	Amount ($)
Expected return ($2,400 × 10%)	240
Actual return	(216)
Loss on plan assets	24

Hence, the loss on plan assets is $24.

 

 

(3) Determine the service cost:

The term pension service cost refers to the present value of the projected retirement benefits earned by plan participants in the current period. A company\'s pension service cost is the amount it must set aside in the current period to match the retirement benefits accrued by plan participants.

The service cost is the difference between the sum of ending balance of service costs and retiree benefits paid and the sum of interest cost and beginning balance of service cost.

 

Use the following table to calculate the service cost.

Particulars	Amount ($)
Ending balance of Service cost	2,501
Add: Retiree benefits paid	270
Less: Interest cost ($2,300 × 7%)	(161)
Beginning balance of Service cost	(2,300)
Service cost	310

Hence, the service cost is $310.

 

(4) Determine the pension cost:

Pension expense is calculated by adding the service cost, interest cost, and amortization of prior cost – AOCI and deduct the expected return and net gain – AOCI. Use the following table to calculate the pension expense:

Particulars	Amount ($)
Service cost	310
Interest cost ($2,300 × 7%)	161
Expected return {$216 (actual) - $24(loss)}	(240)
Amortization of:
Prior service cost – AOCI ($325 - $300)	25
Net gain – AOCI ($330 - $300 - $24)	(6)
Pension expense	250

 

Hence, the pension expense is $250.

 

(5) Determine the average remaining service life of active employees:

The average remaining service life of active employees is calculated by dividing the excess net gain over expected return with the amortized net gain per year. Use the following table to calculate the average remaining service life of active employees:

 

Particulars	Amount ($)
Net gain, January 1	330
Less: Expected return	(240)
Excess net gain over expected return	90
Amortization net gain per year	6
Average service period	15 Years

 

Hence, average remaining service life of active employees is 15 years.

(1) Hence, the actual return on plan assets is $216.

(2) Hence, the loss on plan assets is $24.