Question

On 1-1-2016, Michaelsen Corporation initiated a funded, noncontributory, defined benefit pension plan and gave employees credit for prior employment. The company complies with generally accepted accounting principles (GAAP). The actuary estimated the prior service cost to be $700,000 on 1-1-2016. Michaelsen contributed $600,000 to the pension fund on 1-1-2016, i.e., funded $600,000. The average remaining service period of current employees is approximately 6 years at all times. Service cost was $50,000 for 2016. The actual return on pension plan assets was 8% for 2016. The settlement rate (i.e., the actuary’s discount rate) is 4% per year. The expected return on pension plan assets is 5% per year. The market related value of pension plan assets is the same as the fair value of pension plan assets. Michaelsen contributed $175,000 to the pension fund on 12-31-2016, i.e., funded $175,000.  

Required

On its 12-31-2016 balance sheet Michaelsen will report a pension plan

Answer 1

company name
Pension Worksheet
Minus sign indicate credit and positive indicate debit.
	Memo fields		AOCI		Pension Expense	Cash	Net pension Liability/Assets
	Pension benefits obligation	Plan assets	Prior service cost	Net gain
Beginning Balance	600000	600000	700000	0			1200000
Service cost	-50000				50000
Interest cost (600000*4%)	-24000				24000
Actual return		48000			-48000
unexpected gain				-18000	18000
Amortization of Prior service cost (700000/6)			-116667		116667
Contribution to pension fund		175000				-175000
Pension benefits paid	0	0
Journal Entries			-116667	-18000	160667	-175000	149000
Ending Balance	526000	823000	583333	-18000			1349000

company name
Journal entries
Date	Account title & explanation	Debit	Credit
	Pension Expense	160667
	Net pension Liability/Assets	149000
	Prior service cost - AOCI		116667
	Net Loss - AOCI		18000
	Cash		175000
	(To record Pension Expense.)

Expected return (Plan assets at fair value * Expected rate of return) (600000*5%)	30000
Actual return (600000*8%)	48000
Unexpected loss (gain)	-18000