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Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2016, with the following beginning balances: plan assets \(200,000; projected benefit obligation \)250,000. Other data relating to 3 years’ operation of the plan are as follows.

2016 2017 2018 Annual service cost \(16,000 \) 19,000 $ 26,000 Settlement rate and expected rate of return 10% 10% 10% Actual return on plan assets 18,000 22,000 24,000 Annual funding (contributions) 16,000 40,000 48,000 Benefits paid 14,000 16,400 21,000 Prior service cost (plan amended, 1/1/17) 160,000 Amortization of prior service cost 54,400 41,600 Change in actuarial assumptions establishes a December 31, 2018, projected benefi t obligation of: 520,000

Instructions (a) Prepare a pension worksheet presenting all 3 years’ pension balances and activities. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) Indicate the pension-related amounts reported in the financial statements for 2018.

Short Answer

Expert verified

Financial statements are those statements that are prepared in every organization at the end of the fiscal year to determine the financial health of an organization. These statements reflect a true and accurate position ofthe company.

Step by step solution

01

(a) Preparation of a pension worksheet presenting all 3 years’ pension balances and activities

Harrington Company
Pension Worksheet for the years 2017 and 2018
General journal entries
Memo record

Particulars

Annual pension expense

Cash

Prior service cost-OCI

OCI-Gain/Loss

Pension asset/liability

Projected benefit obligation

Plan assets

Balance Jan 1, 2016

$50,000 Cr.

$250,000 Cr.

$200,000 Dr.

Service cost

$16,000 Dr.

$25,000 Cr.

Interest cost $250,000×10%

$25,000 Dr.

$450,000 Cr.

Actual return

$18,000 Cr.

$18,000 Dr.

Unexpected Loss $437,000×10%

$2,000 Cr.

$2,000 Dr.

Contributions

$16,000 Cr.

$16,000 Dr.

Benefits

$14,000 Dr.

$14,000 Cr.

Journal entry for 2016

$21,000 Dr.

$16,000 Cr.

$2,000 Dr.

$7,000 Cr.

Accumulated OCI Dec 31, 2015

0

Balance Dec 31, 2016

$2,000 Dr.

$57,000 Cr.

$277,000 Cr.

$220,000 Dr.

Additional PSC Jan 1, 2017

$160,000 Dr.

$160,000Cr.

Balance Jan 1, 2017

$437,000 Cr.

Service cost

$19,000 Dr.

$19,000 Cr.

Interest cost $437,000×10%

$43,700 Dr.

$43,700 Cr.

Actual return

$22,000 Cr.

$22,000 Dr.

Amortization of PSC

$54,400 Dr,

$54,400 Cr.

Contributions

$40,000 Cr.

$40,000 Dr.

Benefits

$16,400 Dr.

$16,400 Cr.

Journal entry for 2017

$95,100 Dr.

$40,000 Cr,

$105,600 Dr.

0

$160,700 Cr.

Accumulated OCI Dec 31, 2016

0

$2,000 Dr.

Balance Dec 31, 2017

$105,600 Dr.

$2,000 Dr.

$217,700 Cr.

$483,300 Cr.

$265.600 Dr.

Service cost

$26,000 Dr.

$26,000 Cr.

Interest cost $483,300×10%

$48,330 Dr.

$48,330 Cr.

Actual return

$24,000 Cr.

$24,000 Dr.

Unexpected loss $265,600×10%-$24,000

$2,560 Cr.

$2,560 Dr.

Amortization of PSC

$41,600 Dr.

$41,600 Cr.

Contributions

$48,000 Cr.

$48,000 Dr.

Benefits

$21,000 Dr.

$21,000 Cr.

Liability gain $483,300+$26,000+$48,330-$21,000-$520,000

$16,630 Cr.

$16,630 Dr.

Journal entry for 2018

$89,370 Dr.

$48,000 Cr.

$41,600 Cr.

$14,070 Cr.

$14,300 Dr.

Accumulated OCI Dec 31, 2017

$105,600 Dr.

$2,000 Dr.

Balance Dec 31, 2018

$64,000 Dr.

$12,070 Cr.

$203,400 Cr.

$520,000 Cr.

$316,000 Dr.

02

(b) Preparation of the journal entries (from the worksheet) to reflect all pension plan transactions and events on December 31 of each year.

Harrington Company
Journal Entries

Date

Particulars

Debit

Credit

2016

Other comprehensive income (Gain/Loss) Dr

$2,000

Pension Expense Dr

$21,000

To Cash

$16,000

To Pension asset/liability

$7,000

(To record the pension expense for the year 2016)

2017

Other comprehensive income (PSC) Dr

$105,600

Pension Expense Dr

$95,100

To Cash

$40,000

To Pension asset/liability

$160,700

(To record the pension expense for the year 2017)

2018

Pension Expense Dr

$89,370

Pension asset/liability Dr

$14,300

To Other comprehensive Income (Gain/Loss)

$14,070

To Other comprehensive Income (PSC)

$41,600

To Cash

$48,000

(To record the pension expense for the year 2018)

03

(c) Indication of the pension-related amounts reported in the financial statements for 2018:

Harrington Company
Income Statement

Particulars

Amount

Pension Expense

$89,370

Harrington Company
Comprehensive Income Statement

Particulars

Amount

Net Income

-

Other comprehensive income/loss

Asset gain/loss

($2,560)

Liability gain

$16,630

Prior service cost amortization

$41,600

Comprehensive Income

-

Harrington Company
Balance sheet

Liabilities

Amount

Pension liability

$203,400

Stockholder’s equity

Accumulated other comprehensive loss (PSC)

$64,000

Accumulated other comprehensive income (Gain/Loss)

$12,070

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Most popular questions from this chapter

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.

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 defi nedbenefi t 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 benefits 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 (\(000 omitted). Actuarial present value of benefi t obligations: Accumulated benefi t obligation (including vested benefits of \)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.

Explain how cash-basis accounting for pension plans differs from accrual-basis accounting for pension plans. Why is cash-basis accounting generally considered unacceptable for pension plan accounting?

Latoya Company provides the following selected information related to its defined benefit pension plan for 2017. Pension asset/liability (January 1) \( 25,000 Cr. Accumulated benefit obligation (December 31) 400,000 Actual and expected return on plan assets 10,000 Contributions (funding) in 2017 150,000 Fair value of plan assets (December 31) 800,000 Settlement rate 10% Projected benefit obligation (January 1) 700,000 Service cost 80,000 Instructions (a) Compute pension expense and prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2017. Preparation of a pension worksheet is not required. Benefits paid in 2017 were \)35,000. (b) Indicate the pension-related amounts that would be reported in the company’s income statement and balance sheet for 2017.

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.

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