Question

Spartan Limited is a publicly traded company on the Toronto Stock Exchange. The company sponsors a defined benefit pension plan for all its employees, and the controller provides you with the following data that relate to the plan for fiscal 2019:

1. On January 1, 2019, the company's defined benefit obligation was $1,050,000, and the fair value of pension plan assets was $950,000.

2. The plan assets generated a return of $98,000 during the year, and Spartan's discount rate was 10%

3. The current service cost is determined using a formula based on the employees’ payroll and was calculated to be $83,000.

4. Spartan made a cash contribution of $150,000 to the plan assets on December 31, 2019.

5. Benefits of $80,000 were paid in 2019. Assume these payments were made a year end.

6. In late December 2019, an actuarial revaluation of the defined benefit obligation establishes that the defined benefit obligation should be 1,200,000.

Instructions 3.1 :

Prepare the journal entry(ies) to record pension expense and the employer's payment to the pension trustee in 2019.

3.2 Determine the plan's surplus or deficit position and the balance of the Net Defined Benefit Liability/Asset account at January 1, 2019 and at December 31, 2019.

3.3 Give an example of what could have caused the actuarial loss?

3.4 What would have been the pension expense for 2019 if Spartan had a defined contribution plan instead?

Answer 1

	Defined Benefit Obligation($)	Pension Plan Assets($)	Net defined benefit liability (Defined benefit obligation - Plan assets)
Opening balance Jan 1,2019	1050000	950000	100000
Add: Interest @10%	105000	98000(Actual)	---
Add-Current service cost	83000	---
Add-Contribution to plan assets	---	150000
Less- benefits paid	(80000)	(80000)
Add-Actutial Loss(Balancing figure)	42000	---
Closing Balance on Dec,31,2019	1200000	1118000	82000

Actual return during the year on the plan asset= $98000

Fair return on the plan asset= $950000*10% = $95000

increase in plan asset due to remeasurement = $98000-$95000= $3000

3.1.Journal entry

Particulars	Debit($)	Credit($)	Remarks
Profit & Loss	93000		Current service cost + Interest on Defined benefit obligation - Fair interest on Pension plan assets =83000+105000-95000 =93000
Other comprehensive income	39000		Acturial loss-remeasurement benefit on the plan assets =42000-3000=39000
Net defined benefit liability	18000		Closing net defined benefitliability- opeing  net defined benefit liability =82000-100000= -18000
Cash Contribution		150000

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3.2

If defined benefit obligation is more than the plan asset then it is Net Defined benefit liability

	jan 1, 2019	Dec,31 , 2019
Defined benefit obligation	1050000	1200000
Plan asset	950000	1118000
Net defined benefit liability	100000	82000

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3.3.

Reasons for acturial loss-

1. Fall  in discount rate

2.Rise in salary escalation rate

3. Rise in number of employees under the plan

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3.4

In case of defined contribution plan the pension expenses will be the contribution made during the year i.e. $150000.