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Buhl Corp. sponsors a defined benefit pension plan for its employees. On January 1, 2017, the following balances relate to this plan

Plan assets

\(480,000

Defined benefit obligation

600,000

Pension asset/liability

120,000

As a result of the operation of the plan during 2017, the following additional data are provided by the actuary

Service cost for 2017

\)90,000

Discount rate, 6% Actual return on plan assets in 2017

55,000

Unexpected loss from change in defi ned benefit obligation, due to change in actuarial predictions

76,000

Contributions in 2017

99,000

Benefits paid retirees in 2017

85,000

Instructions

(a) Using the data above, compute pension expense for Buhl Corp. for the year 2017 by preparing a pension worksheet.

(b) Prepare the journal entry for pension expense for 2017.

Short Answer

Expert verified

a. Worksheet is prepared in Step 2.

b. Journal entry is recorded in Step 3.

Step by step solution

01

Definition of Pension Expenses

The expenses reported by the business entity in respect of the pension payable to the employees of the enterprise are known as pension expenses.

02

Calculation of pension expenses

Item

Annual pension expenses

Cash

OCI prior service cost

OCI gains/losses

Pension assets/liability

Projected benefit obligations

Plan assets

Balance on 1 Jan 2017

($120,000)

$600,000

$480,000

Service cost

$90,000

($90,000)

Interest cost 9% of $600,000

$54,000

($54,000)

Actual return

($55,000)

$55,000

Unexpected gains

$3,000

($3,000)

Amortization of PSC

$19,000

($19,000)

Liability increase

$76,000

($76,000)

Contribution

($99,000)

$99,000

Benefits

$85,000

($85,000)

$111,000

($99,000)

($19,000)

$73,000

($66,000 )

($111,000+$73,000-$99,000-$19,000)

$100,000

$81,000

$73,000

($186,000)

$735,000

($549,000+$186,000)

$549,000

03

Journal entry for pension expenses

Date

Accounts and Explanation

Debit $

Credit $

Pension expenses

$111,000

Other comprehensive income

$73,000

Cash

$99,000

Other comprehensive income

$19,000

Pension asset/liability

$66,000

(To record the pension expenses)

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Most popular questions from this chapter

Erickson Company sponsors a defined benefit pension plan. The corporationโ€™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.

Hawkins Corporation has the following balances at December 31, 2017. Projected benefit obligation $2,600,000 Plan assets at fair value 2,000,000 Accumulated OCI (PSC) 1,100,000 How should these balances be reported on Hawkinsโ€™ balance sheet at December 31, 2017?

Lemke Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the years 2017 and 2018. 2017 2018 Projected benefi t obligation, January 1 \(600,000 Plan assets (fair value and market-related value), January 1 410,000 Pension asset/liability, January 1 190,000 Cr. Prior service cost, January 1 160,000 Service cost 40,000 \) 59,000 Settlement rate 10% 10% Expected rate of return 10% 10% Actual return on plan assets 36,000 61,000 Amortization of prior service cost 70,000 50,000 Annual contributions 97,000 81,000 Benefits paid retirees 31,500 54,000 Increase in projected benefi t obligation due to changes in actuarial assumptions 87,000 โ€“0โ€“ Accumulated benefi t obligation at December 31 721,800 789,000 Average service life of all employees 20 years Vested benefi t obligation at December 31 464,000 Instructions (a) Prepare a pension worksheet presenting both years 2017 and 2018 and accompanying computations and amortization of the loss (2018) using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) For 2018, indicate the pension amounts reported in the financial statements.

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 โ€œaccounting for the employerโ€ and โ€œaccounting for the pension fund.โ€

(c) Explain the terms โ€œfundedโ€ and โ€œpension liabilityโ€ 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.

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 โ€“0โ€“ 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.

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