Question

Actuary and trustee reports indicate the following changes in the PBO and plan assets of Douglas-Roberts Industries during 2018: Prior service cost at Jan. 1, 2018, from plan amendment at the beginning of 2015 (amortization: $5 million per year) $ 25 million Net loss—AOCI at Jan.1, 2018 (previous losses exceeded previous gains) $ 112 million Average remaining service life of the active employee group 10 years Actuary's discount rate 5 % ($ in millions) Plan PBO Assets Beginning of 2018 $ 800 Beginning of 2018 $ 600 Service cost 70 Return on plan assets, 6% (8% expected) 36.0 Interest cost, 5% 40.0 Loss (gain) on PBO (19 ) Cash contributions 106 Less: Retiree benefits (40 ) Less: Retiree benefits (40 ) End of 2018 $ 851.0 End of 2018 $ 702.0 Required: 1-a. Determine Douglas-Roberts' pension expense for 2018. 1.b, 2. to 4. Prepare the appropriate journal entries to record the pension expense, to record any 2018 gains and losses, to record the cash contribution to plan assets and to record retiree benefits.

Answer 1

Requirement 1

                                                                                                                                                            ($ in millions)

            Pension expense (calculated below)                                         70.2*

            Plan assets (expected return on assets)                                       48

                 Amortization of net loss–OCI                                                   3.2

                 Amortization of prior service cost–OCI                                     5
                 PBO ($70 service cost + $40 interest cost)                                     110

                          * Service cost                                                                              $ 70

                              Interest cost                                                                                   40

                              Expected return on the plan assets ($36 actual, plus $12 loss)      (48)

                              Amortization of prior service cost                                                   5

                              Amortization of net loss                                                                  3.2

                                 Pension expense                                                                    $ 70.2

                                    Computation of net loss amortization:
                                             Net loss–AOCI (previous losses exceeded previous gains)          $ 112
                                             10% of $800 PBO (greater than $600 plan assets)                              (80)
                                                  Amount to be amortized                                                                   $ 32

                                                                                                                                                                ÷ 10 years
                                             Amortization                                                                                              $3.2

The amortization amounts are reported as other comprehensive income in the statement of comprehensive income.

Requirement 2

                                                                                            ($ in millions)

            Loss–OCI ($36 actual return on assets – $48 expected return)            12

                 Plan assets                                                                               12

    

            PBO                                                                                   19

                 Gain–OCI (from change in assumption regarding the PBO)                   19

           

Requirement 3

                                                                                                                     ($ in millions)

                               Plan assets                                                                        106

                                    Cash (contribution)                                                                  106

Requirement 4

                                                                                                                     ($ in millions)

            PBO                                                                                  40
                 Plan assets (retiree benefit payments)                                             40