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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

Given the following items and amounts, compute the actual return on plan assets: fair value of plan assets at the beginning of the period \(9,500,000; benefits paid during the period \)1,400,000; contributions made during the period \(1,000,000; and fair value of the plan assets at the end of the period \)10,150,000.

Englehart Co. provides the following information about its postretirement benefit plan for the year 2017. Service cost $ 90,000 Prior service cost amortization 3,000 Contribution to the plan 56,000 Actual and expected return on plan assets 62,000 Benefits paid 40,000 Plan assets at January 1, 2017 710,000 Accumulated postretirement benefit obligation at January 1, 2017 760,000 Accumulated OCI (PSC) at January 1, 2017 100,000 Dr. Discount rate 9% Instructions Compute the postretirement benefit expense for 2017.

Using the information in E20-19, prepare a worksheet inserting January 1, 2017, balances, and showing December 31, 2017, balances. Prepare the journal entry recording postretirement benefit expense.

What is service cost, and what is the basis of its measurement?

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1994. Prior to 2017, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2017, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to \(5,000,000 and the fair value of pension plan assets was \)3,000,000. The market-related asset value was also \(3,000,000. Unrecognized prior service cost was \)2,000,000. On December 31, 2017, the projected benefit obligation and the accumulated benefit obligation were \(4,850,000 and \)4,025,000, respectively. The fair value of the pension plan assets amounted to \(4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2017 amounted to \)200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2017. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.)

(a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2017, 2018, and 2019.

(b) Compute pension expense for the year 2017.

(c) Compute the amount of the 2017 increase/decrease in net gains or losses and the amount to be amortized in 2017 and 2018.

(d) Prepare the journal entries required to report the accounting for the company’s pension plan for 2017

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