Exercise 17 - practice 7 PDF

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Download Exercise 17 - practice 7 PDF

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Exercise 17-16 (Static) Determine and record pension expense and gains and losses; funding and retiree benefits [LO17-6, 17-7] Actuary and trustee reports indicate the following changes in the PBO and plan assets of Douglas-Roberts Industries during 2021: Prior service cost at Jan. 1, 2021, from plan amendment at the beginning of 2018 (amortization: $4 million per year) Net loss—AOCI at Jan. 1, 2021 (previous losses exceeded previous gains) Average remaining service life of the active employee group Actuary's discount rate

($ in millions) PBO Beginning of 2021 Service cost

$600 80

$28 million $80 million 10 years 7%

Plan Assets $400 Beginning of 2021 Return on plan assets, 8% (10% expected) 32

Interest cost, 7% 42 Loss (gain) on PBO (14) Cash contributions 90 Less: Retiree benefits (38) Less: Retiree benefits (38) $670 End of 2021 $484 End of 2021

Required: 1-a. Determine Douglas-Roberts's pension expense for 2021. 1-b, 2. to 4. Prepare the appropriate journal entries to record the pension expense, to record any 2021 gains and losses, to record the cash contribution to plan assets and to record retiree benefits.

Pension Expense Service costselected answer correct

$80selected answer correct

Interest costselected answer correct

42selected answer correct

Amortization of prior service costselected answer correct Expected return on plan assetsselected answer correct Amortization of net lossselected answer correct

4selected answer correct (40)selected answer correct 2selected answer correct

not attempted

not attempted

Pension expense

No Event 1

1

$88

General Journal Pension expenseselected answer correct Plan assetsselected answer correct Amortization of net loss - OCIselected answer correct Amortization of prior service cost - OCIselected answer correct PBOselected answer correct

2

2

Loss - OCIselected answer correct Plan assetsselected answer correct

3

3

PBOselected answer correct Gain - OCIselected answer correct

4

4

Plan assetsselected answer correct Cashselected answer correct

Debit

Credit

88selected answer correct 40selected answer correct not attempted

2selected answer correct

not attempted

4selected answer correct

not attempted

122selected answer correct

not attempted not attempted

8selected answer correct

not attempted

not attempted

8selected answer correct

14selected answer correct

not attempted

not attempted 14selected answer correct 90selected answer not attempted correct not attempted 90selected answer correct

5

5

PBOselected answer correct Plan assetsselected answer correct

38selected answer correct not attempted

Explanation

1. Amortization of net loss—OCI (current amortization)** = $2 Amortization of prior service cost—OCI (current amortization)** = $4 PBO ($80 service cost + $42 interest cost) = $122 Pension expense: Service cost $ 80 Interest cost 42 Expected return on the plan assets ($32 actual, plus $8 loss) (40) Amortization of prior service cost 4 Amortization of net loss 2 $ 88 Pension expense

Computation of net loss amortization:

Net loss—AOCI (previous losses exceeded previous gains)$ 80 10% of $600 PBO (greater than $400 plan assets) (60) $ 20 Amount to be amortized ÷ 10 years Amortization $ 2

not attempted 38

The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. The service cost component of pension expense ($80M) is reported in the income statement as part of the total compensation costs arising from services rendered by the employees during the period, separate from the other (non-service cost) components of pension expense. This presentation reflects the nature of service cost being different from that of the other elements of pension cost. The nonservice cost components of pension expense ($8M) are presented in the income statement also, but separate from the service cost component and outside the subtotal of income from operations. **Because Prior service cost—AOCI and Net loss—AOCI have debit balances, we amortize them with a credit. We would amortize a Net gain—AOCI (credit balance) with a debit. After the two amortization amounts are reported as OCI in this year’s statement of comprehensive income, the respective AOCI amounts in the balance sheet are reduced. Note: At first glance, it may appear that the Prior service cost—AOCI and Net loss—AOCI are being amortized over different time periods since the balance in the PSC is $28 and the amortization is $4 and $28 ÷ 4 = 7. Actually, though, both the PSC and the net loss are amortized in 2021 using 10 years. Remember, the PSC arose 3 years ago, so 3 year’s amortization would be 3 x $4 = $12. Added to the current balance of $28, we see the original PSC was $40. Amortizing that balance by 10 years (same as used to amortize the net loss) gives us the $4. (It’s also possible that the average remaining service life three years ago could have been slightly different than now, since that number can change over time, but not by much.) 2. Loss—OCI ($32 actual return on assets − $40 expected return) = $8...