Question

Question One

Barrett Corporation manufactures leather products. The corporation uses a non-contributory, defined benefit pension plan for its 230 employees.

The footnote to the financial statements relating to the pension plan, in part, stated: Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the tax law. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date.

The net periodic pension expense on Barrett Corporation’s comparative income statement showed an increase between 2016 and 2017.

The corporation provided the following information related to its defined benefit pension plan at December 31, 2018:

Defined benefit obligation                                                                                   $2,737,000

Fair value of plan assets                                                                                         2,278,329

Accumulated OCI – Net loss (1/1/18 balance: –0–)                                               34,220

Other pension data  

Service cost for 2018                                                                                                  94,000

Actual return on plan assets in 2018                                                                     130,000

Interest on January 1, 2018, defined benefit obligation                                   164,220

Contributions to plan in 2018                                                                                  93,329

Benefits paid                                                                                                             140,000

Discount (interest) rate                                                                                                   6%

The new CEO, Patricia Wright, while reviewing the previous three year’s financial statements with the Controller, Helen Stewart, had some concerns. Given that Barrett Corporation’s work force has been stable for the last 6 years, Patricia could not understand the increase in the net periodic pension expense between 2016 and 2017. Helen explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense.

Instructions

a. The determination of the net periodic pension expense is a function of two elements. List and briefly describe each of the elements.

b. Describe the major difference and the major similarity between the vested benefit obligation and the defined benefit obligation.

c. Explain what are pension gains and losses and why they are not recognized in net income in the period in which they arise.

d. Briefly describe how pension gains and losses are recognized.  

e. Prepare the note disclosing the components of pension expense for the year 2018.  

f. Net income for 2018 is $35,000. Determine the amounts of other comprehensive income and comprehensive income for 2018.

g. Compute accumulated other comprehensive income reported at December 31, 2018.                     

Answer 1

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