Question

Major Medical reported a net loss–AOCI in last year’s balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $12 million. Also, the $22 million actual return on plan assets fell short of the $24 million expected return.

How does this gain and loss affect Major’s income statement, statement of comprehensive income, and balance sheet?

Answer 1

Solution:

The effect of the gain and loss income statement, statement of comprehensive income, and balance sheet:

Description	Amount(in million)
Income statement
Net income	$0
Comprehensive income statement
Gain - OCI	$12
Loss - OCI	$2
Balance sheet
Net pension liability decreases by	$10
Net loss- AOCI decreases by	$10

working note 1:

compute the gain OCI and loss OCI in the following manner:

Date	Account Title and Explanation	Debit(million)	Credit(million)
	PBO	$12
	Gain OCI		$12
	(To record the gain from the change in assumption)
	Loss OCI(24 -22)	$2
	Plan assets		$2
	(To record the loss from the actual return falling short of expected returns)

Working note 2:

Compute the net pension liability and the net loss AOCI in the following manner:

	Description	Amount (million)
	Plan assets	$2
Less:	PBO	($12)
	Net pension liability decrease	($10)
	Loss -OCI	$2
Less	Gain OCI	($12)
	Net loss - AOCI decrease	($10)