Question

BIUC has just implemented and sponsored a defined benefit plan for its employees in fiscal 2017, where no past service benefits have been granted (Lento & Ryan, 2016). The following additional information was obtained from an actuarial report that has been prepared as at the year end:

Service cost for 2017: $95,000

Discount or settlement rate: 8%

Actual return on plan assets for 2017: 8%

Contribution (plan funding) in 2017: $87,000

Expected rate of return for 2017: 8%

The initial contribution of $87,000 was made on August 1, 2017 and currently, BIUC has expensed the contribution as part of the management salaries and benefits (on the income statement) for $110448 (Lento, & Ryan, 2016).

what is the issue with this? and what do you recommend BIUC company do to fix their records

Answer 1

The Contribution made by the company should not be expensed in the same year.

The contributions are to be added to the Plan Assets in the Balance Sheet and cannot be taken to Income Statement. Only Pension Expense is to be shown in the income statement.

Therefore, BIUC need to deduct the contribution portion from the Management Salaries and Benefits, therefore it will be decreased by $87,000.

Pension Expense is to be debited and Defined Benefit Obligation is to be credited.

Pension Expense is,

= Service Cost - Expected Return on Plan Assets

= $95,000 - $87,000 x 8% x 5/12

= $95,000 - $2,900

= $92,100

The Net Effect to the Income statement by correcting this would be, a decrease in Net Income by $5,100 ($92,100 - $87,000)