Question

Shroff Company has a defined benefit pension plan. The following data relate to the operation of the plan for 2019.

A. Prepare a pension worksheet and the journal entry to record the pension expense for 2019.

Plan assets (fair value), 1/1 $29,000

Projected benefit obligation, 1/1 35,000

Prior service cost, 1/1 2,600

unrecognized net gain/loss (debit), 1/1 4,800

Service cost 2,500

Actual gain on plan assets 1,500

Amortization of prior service cost 300

Annual contributions 3,400

Benefits paid 2,700

Settlement rate 5%

Expected rate of return 6%

Average service life of employees 10 yrs

B. Suppose plan assets of Shroff Company make about $5,000 more than expected in both 2020 and 2021. How would this affect Shroff’s net income in 2020 and 2021 and why? From this example, what do you think is the main role of the AOCI in the current US pension accounting?

Answer 1

Calulation of Pension Expense:

Sevice Cost 2500

Interest Cost (35000*5%) (Refer Note 1) 1750

Actual Gain on Plan Assets (1500)

Amortized prior service cost 300

Deferred Gain/(Loss) from Plan assets (Refer Note 2) (240)

Amortization of Excess prior deferred loss (Refer Note 3) 1300

Expense for Pension Cost 4110

Recording of Pension Expense:

Journal Entry to record Year 1 Service Cost, inerest cost and actual return on plan assets (2500+1750-1500)

Net Pension Expense 2750

Pension Liability/Asset 2750

Journal Entry to defer excess loss of $240 on plan assets

Other Comprehensive Income 240

Net Pension Expense 240

Journal entry to record amortization prior service cost of $300

Net Pension Expense 300

Other Comprehensive Income 300

Journal entry to record amortization of deferred net loss of $1300

Net Pension Expense 1300

Other Comprehensive Income 1300

Note:

1. Calculation of Interest Cost:

Beginning Project Benefit Obligation * Settlement Rate = $35000*5% = 1750

2. Deferred loss from Plan Assets:

Actual Return - Expected Return ( Fair Value of Plan assets * Expected Rate of return)

= 1500 - (29000*6%)

= (240)

3. Amortization of Excess deferred prior loss:

Beninning Deferred Amount - 10% of Higher of Plan Benefit Obligation or Plan Assets

= 4800 - 10% of ($35000 or $29000)

= 4800 - 3500

= 1300