Practice ACC 3100 Pension PDF

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Summary

Pension practice for test 2 ...

Description

The following refers to the pension spreadsheet (columns have missing amounts) for the current year for Pancho Villa Enterprises (PVE). ($ in millions) Debit(Credit ) Beginning balance Service cost Interest cost Expected return on assets Gain/loss on assets Amortization of: Prior service cost Net gain/loss Loss on PBO Contribution s to fund Retiree benefits paid Ending balance

Plan Asset s

PBO

Prior Servic e

Net

Pension

Cost

(Gain)/Loss

Expense

450

60

55

Net Pension Cash

(Liability)/Asset 5 0

(85) (25) 55 3

(1) (65) 40

(53 ) 0

54

122

What were the retiree benefits paid? Explanation Plan assets PBO beginning of year

$450 ? $400

Net pension asset

$ 50

$400 PBO beginning of year + $85 + $25 + $65 − $? = $530 PBO end of year. ? = $45 retiree benefits paid. Anthers Inc. bought the following portfolio of trading securities near the end of 2021.

Security A B C

Cost $80,000 60,000 22,000

Fair value 12/31/2021 $84,000 54,000 22,000

What amount will be reported in the balance sheet for this portfolio at December 31, 2021, and how will it be classified?

a. b. c.

Amount $162,000 $162,000 $160,000

Classification Noncurrent Asset Current Asset Noncurrent Asset

d.

$160,000

Current Asset

Explanation $84,000 + $54,000 + $22,000 = $160,000 The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

($ in millions) Debit(Credit) Beginning balance Service cost Interest cost Expected return on assets Gain/loss on assets Amortization of: Prior service cost Net gain/loss Loss on PBO Contributions to fund Retiree benefits paid

PBO (750)

Ending balance

Plan Assets

Prior Service Cost 33

Net (Gain)/Loss (95)

Pension Expense

Net Pension (Liability)/ Cash Asset

67 60 73 (5) (6) 6 (7) (50) (70)

?

786

(86)

127

What was the net pension asset/liability reported in the balance sheet at the end of the year?

Explanation

Service cost (from pension expense column) = $67 = ($67) in the PBO column Interest cost (from pension expense column) = $60 = ($60) in the PBO column Loss on PBO (given) = ($7) Retiree benefits (from plan assets column) = ($70) = $70 in the PBO column Ending PBO = ($750) + ($67) + ($60) + ($7) + $70 = ($814) Net pension liability = ($814) + $786 = ($28) Net pension liability of $28 million. At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

$4.5 million. Explanation (in millions) FV in excess of book value Share of ownership

$ 15 30%

Additional depreciation, in total

$4.5

Lewis Industries adopted a defined benefit pension plan on January 1, 2021. By making the provisions of the plan retroactive to prior years, Lewis incurred a prior service cost of $3 million. The prior service cost was funded immediately by a $3 million cash payment to the fund trustee on January 2, 2021. However, the cost is to be

amortized (expensed) over 10 years. The service cost—$290,000 for 2021—is fully funded at the end of each year. Both the actuary's discount rate and the expected rate of return on plan assets were 9%. The actual rate of return on plan assets was 11%. At December 31, the trustee paid $24,000 to an employee who retired during 2021. Required: Determine each of the following amounts as of December 31, 2021, the fiscal year-end for Lewis: (Enter your answers in whole dollars.)

Explanation

Balance at Jan. 1 Prior service cost Amortization of prior service cost ($3,000,000 ÷ 10 years) Service cost Interest cost ($3,000,000* × 9%) Return on plan assets Actual ($3,000,000** × 11%) Expected ($3,000,000** × 9%) Retirement payments Cash contribution Balance at Dec. 31

Projected Benefit Obligation $ 0 3,000,000

Pension Expense

Plan Assets $ 0 3,000,000 $

300,000

290,000

290,000

270,000

270,000 330,000 (270,000)

(24,000) $ 3,536,000

(24,000) 290,000 $3,596,000

$

590,000

Note: The $60,000 gain ($330,000 − $270,000), while not included in pension expense, is reported as a gain—OCI in the statement of comprehensive income; it is carried forward as part of accumulated other comprehensive income in the balance sheet to be combined with future gains and losses, which will be included in pension expense only if the net gain or net loss exceeds 10% of the higher of the PBO or plan assets. * Since the plan was adopted at the beginning of the year, the prior service cost increased the PBO at that time. ** Since the prior service cost was funded at the beginning of the year, the plan assets were increased at that time. Babcock Company received the following reports of its defined benefit pension plan for the current calendar year: PBO Balance, January 1 Service cost Interest cost Benefits paid

$620,000 365,000 74,000 (94,000)

Plan assets Balance, January 1 Actual return Annual contribution Benefits paid

$520,000 54,000 224,000 (94,000)

Balance, December 31

$965,000

Balance, December 31

$704,000

The long-term expected rate of return on plan assets is 8%. Assuming no other data are relevant, what is the pension expense for the year?

$397,400. Explanation Service cost Interest cost Expected return on plan assets

$365,000 74,000 (41,600)

Pension expense

$397,400

On July 1, 2021, Tremen Corporation acquired 25% of the shares of Delany Company. Tremen paid $3,020,000 for the investment, and that amount is exactly equal to 25% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,400,000 for 2021, and paid $160,000 of dividends each quarter to its shareholders. After all closing entries are made for the year ended December 31, 2021, Tremen's "Investment in Delany Company" account would have a balance of:

$3,115,000. Explanation$3,020,000 + (25%)(1/2 of the year)($1,400,000 − $640,000) = $3,115,000

On January 1, 2021, Rupar Retailers purchased $125,000 of Anand Company bonds at a discount of $9,000. The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2021, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:

Explanation $4,071.

1/1/2021

Investment in bonds

$ 125,000

Discount on bond investment

$

Cash

$ 116,000

6/30/2021 Cash (0.06/2) × ($125,000) Discount on bond investment (difference)

$

3,750

$

310

Interest revenue (0.07/2) × ($125,000 − $9,000) 12/31/2021 Cash (0.06/2) × ($125,000) Discount on bond investment (difference)

$

3,750

$

321

Interest revenue (0.07/2) × ($125,000 − $9,000 + $310)

The Kollar Company has a defined benefit pension plan. Pension information concerning the fiscal years 2021 and 2022 are presented below ($ in millions): Information Provided by Pension Plan Actuary: a. Projected benefit obligation as of December 31, 2020 = $1,700. b. Prior service cost from plan amendment on January 2, 2021 = $500 (straight-line amortization for 10-year average remaining service period). c. Service cost for 2021 = $540. d. Service cost for 2022 = $590. e. Discount rate used by actuary on projected benefit obligation for 2021 and 2022 = 10%. f. Payments to retirees in 2021 = $400. g. Payments to retirees in 2022 = $470. h. No changes in actuarial assumptions or estimates. i. Net gain—AOCI on January 1, 2021 = $240. j. Net gains and losses are amortized for 10 years in 2021 and 2022. Information Provided by Pension Fund Trustee: a. Plan asset balance at fair value on January 1, 2021 = $1,300. b. 2021 contributions = $560. c. 2022 contributions = $610. d. Expected long-term rate of return on plan assets = 12%. e. 2021 actual return on plan assets = $110. f. 2022 actual return on plan assets = $160. Required: 1. Calculate pension expense for 2021 and 2022.

9,000

$

4,060

$

4,071

Explanation

1.

Service cost (given) Interest on PBO (2021: 10% × $2,200*; 2022: 10% × $2,560*) Expected return (2021: 12% × $1,300; 2022: 12% × $1,570**) Amortization of prior service cost ($500 ÷ 10 years) Amortization of net gain *** Pension expense

*PBO

Balance, 1-1-2021 Prior service cost Balance, 1-2-2021 Interest 10% Service cost Payments Balance, 12-31-2021 Interest 10% Service cost Payments Balance, 12-31-2022

**Plan Assets Balance, 1-1-2021 $1,300 2021 contribution 560 2021 actual return 110 Payments (400) Balance, 12-31-2021 $1,570 2022 contribution 610

$1,700 500 $2,200 220 540 (400) $2,560 256 590 (470) $2,936

($ in millions) 2021 2022 $ 540 $ 590 220 (156) 50

256 (188.4) 50

(7) None $ 647 $ 707.6

2022 actual return 160 Payments (470) Balance, 12-31-2022 $1,870

***Net Gain—AOCI

2021 Net gain—AOCI at 1-1-2021 10% of $1,700 ($1,700 is greater than $1,300): Excess at the beginning of the year Average remaining service period ÷ Amount amortized to 2021 pension expense

$ 240 (170) $ $

70 10 years 7

2022 Net gain—AOCI at 1-1-2021 Loss in 2021 (actual return: $110 − expected return: $156) Amortization in 2021 (calculated above) Net gain—AOCI at 1-1-2022 10% of $2,560 ($2,560 is greater than $1,570): No excess at the beginning of the year

No amortization for 2022

2. Prepare the journal entries for 2021 and 2022 to record pension expense.

$ 240 (46) (7) $ 187 (256) None

2021 PBO ($540 service cost + $220 interest cost) = $760 2022 PBO ($590 service cost + $256 interest cost) = $846 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Companies report the service cost component of pension expense 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 non-service cost components of pension expense 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 has a debit balance, we amortize it with a credit. We 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.

3. Prepare the journal entries for 2021 and 2022 to record any gains and losses and new prior service cost.

2021 Loss—OCI ($110 actual return on assets less than $156 expected return) = $46 2022 Loss—OCI ($160 actual return on assets less than $188.4 expected return) = $28.4 4. Prepare the journal entries for 2021 and 2022 to record (a) the cash contribution to plan assets and (b) the benefit payments to retirees

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