Question

Feeble Co. on January 1, 2011 initiated a noncontributory, defined-benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan. The total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the present value of the projected benefit obligation on January 1, 2011 was $5,040,000. On December 31, 2011 the following information was provided concerning the pension plan's operations for its first year. Employer's contribution at end of year $1,600,000 Service cost 600,000 Projected benefit obligation 6,043,200 Plan assets (at fair value) 1,600,000 Expected return on plan assets 9% Settlement rate 8%

(a) What's the pension expense recognized in 2011. Assume the prior service cost is amortized over the average remaining service life of the employees. (b) What are the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2011. (c) What amounts are reported on the income statement and the balance sheet for 2011.

Answer 1

Answer 1
Total expected service-years of the 100 employees	1,200
Divided by: Number of employee	100
Average remaining service life	12
Service cost	$              600,000
Add: Interest on projected benefit obligation (5040000*8%)	$              403,200
Add: Amortization of prior service cost (5040000/12)	$              420,000
Pension expense recognized in 2011	$          1,423,200

Answer 2
Journal entries
Date	General Journal	Debit	Credit
December 31, 2011	Pension Expense	1,423,200
	Pension Asset / Liability	596,800
	Cash		1,600,000
	Other comprehensive income (OCI)		420,000
	(To record entries to reflect accounting for the company's pension plan for the year ended December 31, 2011)

Hint:
Cash = Employer's contribution at end of year $1,600,000
Other comprehensive income (OCI) = Amortization of prior service cost
Service cost	$              600,000
Interest on projected benefit obligation	$              403,200
Amount credited to Pension liability	$          1,003,200
Amount Debited to Pension Assets (Employer's contribution at end of year)	1,600,000
Less: Amount credited to Pension liability	$          1,003,200
Net Amount debited to Pension Asset / Liability	$              596,800

Answer 3
Income Statement
Pension Expense	$          1,423,200
Balance sheet
Liabilities
Pension liability (6043200-1600000)	$          4,443,200
Stockholders’ Equity
Accumulated Other comprehensive income - OCI (PSC) (5040000-420000)	$          4,620,000
(Please note that Other comprehensive income is added to net income in order to determine total comprehensive income. Presentation of Net income and Total comprehensive income shown under Income statement or Separate statement or Balance sheet.)

Why was the projected benefit obligation used to compute the amort. of prior service costs?

(Hint:defined-benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan. Pension plant adopted on January 1, 2011. Projected benefit obligation on [Date of Adoption plan] January 1, 2011 amortized over the remaining service year.

Why wasn't the expected return on plan assets used in the pension expense calculation?

Plant assets at the beginning = Ending value of Plan assets - Employer's contribution at end of year = $ 1600000 - $ 1600000 = $ 0 = Zero

(Expected return on plant assets calculate based on the value of plan assets on Date of beginning year. Here, Plant asset at the beginning is Zero.)