Question

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2017. Projected benefit obligation \(4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2018, the company amends its pension agreement so that prior service costs of \)600,000 are created. Other data related to the pension plan are: 2017 2018 Service cost \(150,000 \)170,000 Prior service cost amortization –0– 90,000 Contributions (funding) to the plan 200,000 184,658 Benefits paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2017. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2017. (c) Prepare a pension worksheet for 2018 and any journal entries related to the pension plan as of December 31, 2018. (d) Indicate the pension-related amounts reported in the 2018 financial statements.

Short answer

A pension agreementis a contract between the organization and its employees, which states the amount creditedto the employee's provident fund. The money collected can be used after retirement.

Step-by-step solution

(a) Preparation of the pension worksheet for 2017.

Hobbs Co.
Pension Worksheet for the year 2017
General journal entries	Memo Record
Particulars	Annual pension expense	Cash	OCI-Gain/Loss	Pension asset/liability	Projected benefit obligation	Plan assets
Balance Jan 1, 2017					$4,600,000 Cr.	$4,600,000 Dr.
Service cost	$150,000 Dr.				$150,000 Cr.
Interest cost $\left(\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$460,000 Dr.				$460,000 Cr.
Actual return	$252,000 Cr.					$252,000 Dr.
Unexpected loss $\left(\left(\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{600}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{6}\mathbf{\%}\right)\mathbf{-}\mathbf{\$}\mathbf{252}\mathbf{,}\mathbf{000}\right)$	$24,000 Cr.		$24,000 Dr.
Contributions		$200,000 Cr.				$200,000 Dr.
Benefits					$220,000 Dr.	$220,000 Cr.
Journal entry for 2017	$334,000 Dr.	$200,000 Cr.	$24,000 Dr.	$158,000 Cr.
Accumulated OCI Dec 31, 2017			0
Balance Dec 31, 2017			$24,000 Dr.	$158,000 Cr.	$4,990,000 Cr.	$4,832,000 Dr.

(b) Journal entry to record the pension expense for 2017.

Hobbs Co.
Journal Entry
Date	Particulars	Debit	Credit
2017	Other comprehensive income (gain/loss)	$24,000
	Pension expense	$334,000
	Cash		$200,000
	Pension asset/liability		$158,000
	(To record the pension expense)

(c) Preparation of pension worksheet and the journal entry for 2018.

Hobbs Co.
Pension Worksheet for the year 2018
General journal entries	Memo Record
Particulars	Annual pension expense	Cash	OCI-Prior service cost	OCI-Gain/Loss	Pension asset/liability	Projected benefit obligation	Plan assets
Additional PSC Jan 1,2018			$600,000 Dr			$600,000 Cr
Balance Jan 1, 2018			.			$5,590,000 Cr.
Service cost	$170,000 Dr.					$170,000 Cr.
Interest cost $\left(\left(\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{990}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{600}\mathbf{,}\mathbf{000}\right)\mathbf{\times }\mathbf{10}\mathbf{\%}\right)$	$559,000 Dr.					$559,000 Cr.
Actual return	$350,000 Cr.						$350,000 Dr.
Unexpected loss $\left(\left(\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{832}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{8}\mathbf{\%}\right)\mathbf{-}\mathbf{\$}\mathbf{350}\mathbf{,}\mathbf{000}\right)$	$36,560 Cr.			$36,560 Dr.
Amortization of PSC			$90,000 Cr.
Contributions		$184,658 Cr.					$184,658 Dr.
Benefits						$280,000 Dr.	$280,000 Cr.
Journal entry for 2018	$432,440 Dr.	$184,658 Cr.	$510,000 Dr.	$36,560 Dr.	$794,342 Cr.
Accumulated OCI Dec 31, 2017			0	$24,000 Dr.
Balance Dec 31, 2018			$510,000 Dr.	$60,560 Dr.	$952,342 Cr.	$6,039,000Cr.	$5,086,658 Dr.

Hobbs Co.
Journal Entry
Date	Particulars	Debit	Credit
2018	Other comprehensive income (gain/loss)	$36,560
	Other comprehensive income (PSC)	$510,000
	Pension expense	$432,440
	Cash		$184,658
	Pension asset/liability		$794,342
	(To record the pension expense)

(d) Preparation of financial statements to indicate the amount.

Hobbs Co.
Income Statement
Particulars	Amount
Pension expense	$432,440

Hobbs Co.
Balance sheet
Liabilities	Amount
Pension liability	$952,342
Stockholder’s Equity
Accumulated other comprehensive loss (PSC)	$510,000
Accumulated other comprehensive loss (Gain/Loss)	$60,560