Question

Erickson Company sponsors a defined benefit pension plan. The corporation’s actuary provides the following information about the plan. January 1, December 31, 2017 2017 Vested benefit obligation \(1,500 \)1,900 Accumulated benefit obligation 1,900 2,730 Projected benefit obligation 2,500 3,300 Plan assets (fair value) 1,700 2,620 Settlement rate and expected rate of return 10% Pension asset/liability 800 ? Service cost for the year 2017 400 Contributions (funding in 2017) 700 Benefits paid in 2017 200 Instructions (a) Compute the actual return on the plan assets in 2017. (b) Compute the amount of the other comprehensive income (G/L) as of December 31, 2017. (Assume the January 1, 2017, balance was zero.) (c) Compute the amount of net gain or loss amortization for 2017 (corridor approach). (d) Compute pension expense for 2017.

Short answer

The corridor approach is the type of approach an organization opts for to decrease their amount of total gains or lossesso that relevant adjustments can be made to thetotal pension expensefor the year.

Step-by-step solution

(a) Computation of the amount of the other comprehensive income (G/L) as of December 31, 2017

Particulars		Amount
Fair value of plan assets Dec 31, 2017		$2,620
Less: Fair value of plan assets, Jan 1 2017		$1,700
Increase in fair value of plan assets		$920
Less: Contributions	$700
Less: Benefits paid	$200	$500
Actual return on plan assets in 2017		$420

(b) Computation of the amount of the other comprehensive income (G/L) as of December 31, 2017

Particulars			Amount
PBO at the end of the year		$3,300
PBO per memo records:
Add: PBO as on 1/1/17	$2,500
Add: Interest @10%	$250
Add: Service cost	$400
Less: Benefits paid	$200	$2,950
Liability loss			$350
Actual fair value of plan assets 12/31/17		$2,620
Less: Expected fair value of plan assets 1/1/17	$1,700
Add: Expected return $\left(\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$170
Add: Contributions	$700
Less: Benefits paid	$200	$2,370
Asset gain			$250
Net (Gain) or Loss			($100)

(c) Computation of the amount of net gain or loss amortization for 2017 (corridor approach).

The computation of the amount of net gain or loss amortization for the year 2017 is not required. There was no net gain or loss at the beginning of the Erickson Company’s financial year by the question.

(d) Computation of pension expense for 2017

Particulars	Amount
Service cost	$400
Add: Interest cost $\left(\mathbf{2}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$250
Less: Actual return on plan assets$\left(\mathbf{\$}\mathbf{170}\mathbf{+}\mathbf{\$}\mathbf{250}\right)$	$420
Add: Unexpected gain	$250
Pension Expense	$480