Question

The Kollar Company has a defined benefit pension plan. Pension information concerning the fiscal years 2018 and 2019 are presented below ($ in millions):

Information Provided by Pension Plan Actuary:

1. Projected benefit obligation as of December 31, 2017 = $1,550.
2. Prior service cost from plan amendment on January 2, 2018 = $450 (straight-line amortization for 10-year average remaining service period).
3. Service cost for 2018 = $530.
4. Service cost for 2019 = $580.
5. Discount rate used by actuary on projected benefit obligation for 2018 and 2019 = 10%.
6. Payments to retirees in 2018 = $390.
7. Payments to retirees in 2019 = $460.
8. No changes in actuarial assumptions or estimates.
1. Net gain—AOCI on January 1, 2018 = $235.
10. Net gains and losses are amortized for 10 years in 2018 and 2019.

Information Provided by Pension Fund Trustee:

1. Plan asset balance at fair value on January 1, 2018 = $1,200.
2. 2018 contributions = $550.
3. 2019 contributions = $600.
4. Expected long-term rate of return on plan assets = 12%.
5. 2018 actual return on plan assets = $100.
6. 2019 actual return on plan assets = $150.

Required:

1. Calculate pension expense for 2018 and 2019.
2. Prepare the journal entries for 2018 and 2019 to record pension expense.
3. Prepare the journal entries for 2018 and 2019 to record any gains and losses and new prior service cost.
4. Prepare the journal entries for 2018 and 2019 to record the cash contribution to plan assets and benefit payments to retirees.

Answer 1

1. Computation of Pension Cost:

Particulars	2018	2019
Service cost	530	580
Amortize Prior Service Cost	45	45
	($450 / 10 years)
Total Service Cost	575	625
Interest Cost	200	234
	($1550+450) x 10%	($2340 x 0.10)
Expected return on plan assets	-144	-175
	($1,200 x 0.12)	($1460 x 0.12)
Amortization of AOCI - Return on plan assets	-24	-24
	($235 / 10 years)
Amortized Net Loss of 2017	-	4
(Actual return of $100 - expected return of $144 = $44 amortized over 10 years)
Net Pension Expense	608	660

Calculations:

PBO
Particulars	2018	2019
Beginning balance	1,550	2,340
Add :Prior Service Cost	450	0
Add: Interest ((1550+450)*10%)	200	234
Less: Benefits paid	-390	-460
Add: Current Service cost	530	580
Closing balance	2,340	2,694
Plan Assets
Particulars	2018	2019
FV of Opening Assets	1,200	1,460
Less: Benefits	-390	-460
Add: Contributions	550	600
Add: Actual Return	100	150
Closing Balance	1,460	1,750
Computation of AOCI
Particulars	2018	2019
Opening Balance	-235	-212
Less: Amortization	24	24
Closing Balance	-212	-188
Difference between expected return and actual return
Opening Balance		44
Add: Loss on actual return (1200*12%)-100	44	25
Less: Amortization (44/10)		-4
Closing Balance	44	65
Net	-168	-123

2. Journal Entries:

Year	Account	Debit	Credit
2018	Current Service Cost	530
	Defined Benefit Obligation		530
	Past Service Cost	45
	AOCI - Past Service Cost		45
	Interest Expense	200
	Defined Benefit Obligation		200
	AOCI (Expected return - Actual return)	44
	Plan Assets (Actual return)	100
	Expected Return (Pension cost)		144
	AOCI (Expected return - Actual return)	24
	Interest Expense		24
2019	Current Service Cost	580
	Defined Benefit Obligation		580
	Past Service Cost	45
	AOCI - Past Service Cost		45
	Interest Expense	234
	Defined Benefit Obligation		234
	AOCI (Expected return - Actual return)	25
	Plan Assets (Actual return)	150
	Expected Return (Pension cost)		175
	AOCI (Expected return - Actual return)	24
	Interest Expense		24
	Interest Expense	4
	AOCI (Expected return - Actual return)		4

3. Journal Entries:

Year	Account	Debit	Credit
2018	AOCI (Expected return - Actual return)	44
	Plan Assets (Actual return)	100
	Expected Return (Pension cost)		144
	AOCI - Past Service Cost	45
	Defined Benefit Obligation		45
2019	AOCI (Expected return - Actual return)	25
	Plan Assets (Actual return)	150
	Expected Return (Pension cost)		175
	AOCI - Past Service Cost	45
	Defined Benefit Obligation		45

4. Journal Entries:

Year	Account	Debit	Credit
2018	Defined Benefit Obligation	390
	Plan Assets		390
	Plan Assets	550
	Cash		550
2019	Defined Benefit Obligation	460
	Plan Assets		460
	Plan Assets	600
	Cash		600