Question

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:

1) Projected benefit obligation

2) Plan assets

3) Pension expense

Answer 1

Projected benefit obligation
Particulars	Amount
Beginning PBO	$3,000,000
Add: Service Cost	$290,000
Add: Interest Cost ($3,000,000 x 9%)	$270,000
Less: Benfits Paid	($24,000)
Projected benefit obligation at Dec. 31	$3,536,000

Plan Assets
Particulars	Amount
Beginning Plan Assets	$0
Add: prior Service Cost	$3,000,000
Actual return on Plan Assets ($3,000,000 x 11%)	$330,000
Cash Contributions	$290,000
Less: Benfits Paid	($24,000)
Plan Assets at Dec. 31	$3,596,000

Pension Expense
Particulars	Amount
prior Service cost Amortization ($3,000,000 / 10 years)	$300,000
Add: Service Cost	$290,000
Add: Interest Cost ($3,000,000 x 9%)	$270,000
Less: Expected return on Plan Assets ($3,000,000 x 9%)	($270,000)
Pension Expense	$590,000