Question

Martinez Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1997. Prior to 2020, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2020, is as follows.

1.		The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years.
2.		The projected benefit obligation amounted to $4,948,000 and the fair value of pension plan assets was $2,965,000. The market-related asset value was also $2,965,000. Unrecognized prior service cost was $1,983,000.

On December 31, 2020, the projected benefit obligation and the accumulated benefit obligation were $4,772,000 and $4,033,000, respectively. The fair value of the pension plan assets amounted to $4,129,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2020 amounted to $199,000. The employer’s contribution to the plan assets amounted to $759,000 in 2020. This problem assumes no payment of pension benefits.

Part 1

Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2020, 2021, and 2022. (Round answers to 0 decimal places, e.g. 2,525.)

Prior Service Cost Amortization
2020		$
2021		$
2022		$

Compute pension expense for the year 2020. (Round answers to 0 decimal places, e.g. 2,525.)

Pension expense

$

Compute the amount of the 2020 increase/decrease in net gains or losses and the amount to be amortized in 2020 and 2021. (Round answers to 0 decimal places, e.g. 2,525.)

Net gain 12/31/20		$
Amortization in 2020		$
Amortization in 2021		$

Prepare the journal entries required to report the accounting for the company’s pension plan for 2020. (Round answers to 0 decimal places, e.g. 2,525. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Answer 1

1)

The prior service cost amortization table is given below:

Prior Service Cost Amortization
2020	$165,250            ($1,983,000/12)
2021	$165,250            ($1,983,000/12)
2022	$165,250            ($1,983,000/12)

2)

The pension expense for year 2020 is calculated as follows:

Service Cost	199,000
Interest on Projected Benefit Obligation (4,948,000*10%)	494,800
Actual Return on Plan Assets (4,129,000 - 2,965,000 - 759,000)	(405,000)
Unexpected Gain (2,965,000*10% - 405,000)	108,500
Amortization of Prior Service Cost	165,250
Pension Expense	$562,550

3)

The value of net gain is calculated as follows:

Fair Value of Plan Assets 31/12/2020			4,129,000
Less Expected Fair Value of Assets
Add Fair Value of Plan Assets 01/01/2020	2,965,000
Expected Return (2,965,000*10%)	296,500
Contributions to the Plan	759,000
Less Benefits	0		4,020,500
Asset Gain			-108,500
Projected Benefit Obligation 31/12/2020		4,772,000
Less Projected Benefit Obligation 01/01/2020	4,948,000
Add Interest (4,948,000*10%)	494,800
Add Service Cost	199,000
Less Benefits	0	5,641,800
Liability Gain			-869,800
Net Gain			-$978,300

The value of Amortization in 2020 and 2021 is calculated as follows:

Year	Projected Benefit Obligation	Fair Value of Plan Assets	Corridor	Accumulated Other Comprehensive Income	Amortization
2020	4,948,000	2,965,000	494,800	0	$0
2021	4,772,000	4,129,000	477,200	-978,300	$41,758 [(978,300 - 477,200)/12]

4)

The journal entries are as follows:

Account Titles and Explanation	Debit	Credit
Pension Expense	$562,550
Pension Asset/Liability [1,983,000 - (4,772,000 - 4,129,000)]	$1,340,000
Other Comprehensive Income (G/L)		$978,300
Other Comprehensive Income (PSC)		$165,250
Cash		$759,000

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