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Elton Co. has the following postretirement benefit plan balances on January 1, 2017. Accumulated postretirement benefi t obligation \(2,250,000 Fair value of plan assets 2,250,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends the plan so that prior service costs of \)175,000 are created. Other data related to the plan are: 2017 2018 Service costs \( 75,000 \) 85,000 Prior service costs amortization –0– 12,000 Contributions (funding) to the plan 45,000 35,000 Benefits paid 40,000 45,000 Actual return on plan assets 140,000 120,000 Expected rate of return on assets 8% 6% Instructions (a) Prepare a worksheet for the postretirement plan in 2017. (b) Prepare any journal entries related to the postretirement plan that would be needed at December 31, 2017. (c) Prepare a worksheet for 2018 and any journal entries related to the postretirement plan as of December 31, 2018. (d) Indicate the postretirement-benefit–related amounts reported in the 2018 financial statements.

Short Answer

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A comparative income statement is a kind offinancial statementwhere theincome statements of previous and current years are combined to ascertain theamounts' changes or variations. It is used to make an investment decisionin the firm.

Step by step solution

01

(a) Pension worksheet for the year 2017

Elton Co.
Pension Worksheet for the year 2017
General journal entries
Memo Record

Particulars

Annual expense

Cash

OCI-Gain/Loss

Pension asset/liability

Annual Projected benefit obligation

Plan assets

Balance Jan 1, 2017

$2,250,000 Cr.

$2,250,000 Dr.

Service cost

$75,000 Dr.

$75,000 Cr.

Interest cost

$2,250,000×10%

$225,000 Dr.

$225,000 Cr.

Actual return

$140,000 Cr.

$140,000 Dr.

Unexpected loss

$2,250,000×8%-$140,000

$40,000 Cr.

$40,000 Dr.

Contributions

$45,000 Cr.

$45,000 Dr.

Benefits

$40,000 Dr.

$40,000 Cr.

Journal entry for 2017

$120,000 Dr.

$45,000 Cr.

$40,000 Dr.

$115,000 Cr.

Accumulated OCI Dec 31, 2017

0

Balance Dec 31, 2017

$40,000 Dr.

$115,000 Cr.

$2,510,000Cr.

$2,395,000 Dr.

02

(b) Journal entry for the year 2017.

Elton Co.
Journal Entry

Date

Particulars

Debit

Credit

2017

Other comprehensive income (gain/loss)

$40,000

Postretirement expense

$120,000

Cash

$45,000

Postretirement asset/liability

$115,000

(To record the pension expense)


03

(c) Pension worksheet for 2018 and its relevant journal entry.

Elton Co.
Pension Worksheet for the year 2018
General journal entriesMemo Record

Particulars

Annual expense

Cash

OCI-Prior service cost

OCI-Gain/Loss

Postretirement asset/liability

Annual Projected benefit obligation

Plan assets

Additional PSC Jan 1, 2018

$175,000 Dr

$175,000 Cr

Balance Jan 1, 2018

.

$2,685,000 Cr.

Service cost

$85,000 Dr.

$85,000 Cr.

Interest cost

$2,685,000×10%

$268,500 Dr.

$268,500 Cr.

Actual return

$120,000 Cr.

$120,000 Dr.

Unexpected loss

$2,395,000×6%-$120,000

$23,700 Cr.

$23,700 Dr.

Amortization of PSC

$12,000 Dr.

$12,000 Cr.

Contributions

$35,000 Cr.

$35,000 Dr.

Benefits

$45,000 Dr.

$45,000 Cr.

Journal entry for 2018

$221,800 Dr.

$35,000 Cr.

$163,000 Dr.

$23,700 Dr.

$373,500 Cr.

Accumulated OCI Dec 31, 2017

0

$40,000 Dr.

Balance Dec 31, 2018

$163,000 Dr.

$63,700Dr.

$488,500 Cr.

$2,993,500Cr.

$2,505,000 Dr.

Elton Co.
Journal Entry

Date

Particulars

Debit

Credit

2018

Other comprehensive income (gain/loss)

$23,700

Other comprehensive income (PSC)

$163,000

Postretirement expense

$221,800

Cash

$35,000

Postretirement asset/liability

$373,500

(To record the pension expense)


04

(d) Preparation of financial statements:

Elton Co.
Income Statement

Particulars

Amount

Postretirement expense

$221,800

Elton Co.
Comparative income statement

Particulars

Amount

Net Income

-

Other comprehensive loss

Asset gain

($23,700)

Plan amendment (PSC)

($175,000)

Prior service cost amortization

$12,000

($186,700)

Comprehensive Income

-

Elton Co.
Balance sheet

Liabilities

Amount

Postretirement liability

$488,500

Stockholder’s Equity

Accumulated other comprehensive loss (PSC)

$163,000

Accumulated other comprehensive loss (Gain/Loss)

$63,700

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Most popular questions from this chapter

What are “liability gains and losses,” and how are they accounted for?

Davis Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Cole has recently been hired as president of Davis Corporation. While reviewing last year’s financial statements with Carol Dilbeck, controller, Cole expressed confusion about several of the items in the footnote to the financial statements relating to the pension plan. In part, the footnote reads as follows. Note J. The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the federal tax code. Contributions are intended to provide for benefi ts expected to be earned in the future as well as those earned to date. The net periodic pension expense on Davis Corporation’s comparative income statement was \(72,000 in 2017 and \)57,680 in 2016. The following are selected figures from the plan’s funded status and amounts recognized in the Davis Corporation’s Statement of Financial Position at December 31, 2017 (\(000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefi ts of \)636) \( (870) Projected benefi t obligation \)(1,200) Plan assets at fair value 1,050 Projected benefi t obligation in excess of plan assets $ (150) Given that Davis Corporation’s work force has been stable for the last 6 years, Cole could not understand the increase in the net periodic pension expense. Dilbeck explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. Instructions (a) The determination of the net periodic pension expense is a function of five elements. List and briefly describe each of the elements. (b) Describe the major difference and the major similarity between the accumulated benefit obligation and the projected benefit obligation. (c) (1) Explain why pension gains and losses are not recognized on the income statement in the period in which they arise. (2) Briefly describe how pension gains and losses are recognized.

What factors must be considered by the actuary in measuring the amount of pension benefits under a defined benefit plan?

Many business organizations have been concerned with providing for the retirement of employees since the late 1800s. Increase in this concern resulted in the establishment of private pension plans in most large companies and in many medium- and small-sized ones. The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, a CPA encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.

Instructions

(a) Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?

(b) Differentiate between “accounting for the employer” and “accounting for the pension fund.”

(c) Explain the terms “funded” and “pension liability” as they relate to: (1) The pension fund. (2) The employer.

(d) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.

(e) Distinguish among the following as they relate to pension plans. (1) Service cost. (2) Prior service costs. (3) Vested benefits.

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.

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