Question

Ferreri Company received the following selected information from its pension plan trustee concerning the operation of the company’s defined benefit pension plan for the year ended December 31, 2017. January 1, December 31, 2017 2017 Projected benefit obligation \(1,500,000 \)1,527,000 Market-related and fair value of plan assets 800,000 1,130,000 Accumulated benefit obligation 1,600,000 1,720,000 Accumulated OCI (G/L)—Net gain –0– (200,000) The service cost component of pension expense for employee services rendered in the current year amounted to \(77,000 and the amortization of prior service cost was \)120,000. The company’s actual funding (contributions) of the plan in 2017 amounted to \(250,000. The expected return on plan assets and the actual rate were both 10%; the interest/discount (settlement) rate was 10%. Accumulated other comprehensive income (PSC) had a balance of \)1,200,000 on January 1, 2017. Assume no benefits paid in 2017. Instructions (a) Determine the amounts of the components of pension expense that should be recognized by the company in 2017. (b) Prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2017. (c) Indicate the pension-related amounts that would be reported on the income statement and the balance sheet for Ferreri Company for the year 2017.

Short answer

A balance sheetis a statement comprising the organization’s assets and liabilitiesthat depicts its financial position. All of the closing amounts are categorized as either assets or liabilities.

Step-by-step solution

(a) Computation of pension expense for 2017.

Particulars	Amount
Service cost	$77,000
Add: Interest on projected benefit obligation $\left(\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$150,000
Less: Expected return on plan assets $\left(\mathbf{\$}\mathbf{800}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$80,000
Add: Amortization of prior service cost	$120,000
Pension Expense	$267,000

(b) Journal entry to record pension expense and the employer’s contribution to the pension plan in 2017.

Ferreri Company
Journal Entry
Date	Particulars	Debit	Credit
2017	Pension Expense	$267,000
	Pension asset/liability	$303,000
	Cash		$250,000
	Other comprehensive income (PSC)		$120,000
	Other comprehensive income (G/L)		$200,000
	(To record the pension expense)

Step 3: Computation of pension liability

Particulars	Amount
Projected benefit obligation Dec 31, 2017	$1,527,000
Less: Plan assets	$1,130,000
Pension Liability	$397,000

Computation of pension worksheet.

Ferreri Corp
Pension Worksheet for the year 2017
General journal entries						Memo record
Particulars	Annual pension expense	Cash	Service cost	OCI-Gain/Loss	Pension asset/liability	Projected benefit obligation	Plan assets
Balance Jan 1, 2017					$700,000 Cr	$1,500,000 Cr.	$800,000 Dr.
Service cost	$77,000 Dr.					$77,000 Cr.
Interest cost $\left(\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$150,000 Dr.					$150,000 Cr.
Actual return	$80,000 Cr.						$80,000 Dr.
Amortization of PSC	$120,000 Dr.		$120,000 Cr.
Liability gain				$200,000 Dr.		$200,000 Cr.
Contributions		$250,000 Cr.					$250,000 Dr.
Journal entry for 2017	$267,000 Dr.	$250,000 Cr,	$120,000 Cr.	$200,000 Dr.	$303,000 Cr.
Accumulated OCI Dec 31, 2017			$1,200,000 Dr.
Balance Dec 31, 2017			$1,080,000 Dr.	$200,000 Dr.	$397,000 Cr.	$1,527,000 Cr.	$1,130,000 Dr.

Computation of the amount of accumulated OCI as of Dec 31, 2017. 

Particulars	Amount
Stockholder’s Equity
Accumulated OCI Jan 1, 2017	$1,080,000
Amortization OCI (Gain/Loss)	$200,000

(c) Amounts that would be reported on the income statement and the balance sheet for the year 2017.

Income Statement
Particulars	Amount
Pension Expense	$267,000

Comprehensive Income Statement
Particulars	Amount
Net Income	-
Other comprehensive income	-
Amortization of PSC $120,000
Add: Liability gain $200,000	$320,000
Comprehensive income	-

Balance Sheet
Liabilities	Amount
Pension Liability	$397,000