Question

1). Whalen, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2020.

                                                                      January 1, 2020         December 31, 20208

Fair value of pension plan assets                         $5,600,000                    $6,000,000

Projected benefit obligation                                   6,400,000                      6,880,000

Accumulated benefit obligation                              1,120,000                      1,360,000

Accumulated OCI – (Gains / Losses)                            -0-                             (120,000)

The service cost component of pension expense for 2020 is $600,000 and the amortization of prior service cost due to an increase in benefits is $80,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2020?

$696,000

$816,000

$600,000

$828,000

2). On December 31, 2020, Lansing, Inc. leased machinery with a fair value of $1,575,000 from Dalton Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $300,000 beginning December 31, 2020. The lease is appropriately accounted for by Lansing as a finance lease. Lansings’s incremental borrowing rate is 11%. Lansing knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2020 balance sheet, Lansing should report a lease liability of

$1,437,240

$1,408,770

$1,275,000

$1,137,240

Answer 1

1

Service Cost 6,00,000

(+) Interest on project benefit obligation (64,00,000* 10%) 6,40,000

(-) Expected return on plan assets (56,00,000*9%) ( 5,04,000)

(+) Amortisation of prior service cost 80,000

Pension expense in 2020 8,16,000

2.

Because the lessee knows the implicit interest rate computed by the lessor and it is less than the lessee’s incremental borrowing rate, then the lessee must use the lessor’s rate (10%)

PV of minimum lease payments = (annual payment – executory costs) x PV factor annuity due = $300,000 × 4.7908 = $1,437,240

Lease liabality at inception 1,437,240

(-) Payment on Dec 31st 2020 (3,00,000)

Lease liabality as on Dec 31st 2020 1,137,240